As filed with the Securities and Exchange Commission on January 31, 1997
Registration No. 333-17635
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT No. 2
to
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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HEURISTIC DEVELOPMENT GROUP, INC.
(Exact name of Small Business Issuer as specified in its charter)
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<S> <C> <C>
Delaware 7371 95-4491750
(State or other (Primary standard industrial (I.R.S. employer
jurisdiction of incorporation) classification code number) identification number)
</TABLE>
17575 Pacific Coast Highway
Pacific Palisades, California 90272
(310) 230-3394
(Address and telephone number of principal executive offices
and principal place of business)
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Jonathan W. Seybold, Chairman of the Board
Heuristic Development Group, Inc.
17575 Pacific Coast Highway
Pacific Palisades, California 90272
(310) 230-3394
(Name, address and telephone number of agent for service)
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Copies to:
Fran M. Stoller, Esq. C. David Selengut, Esq.
Bachner, Tally, Polevoy & Misher LLP Singer Zamansky LLP
380 Madison Avenue 40 Exchange Place
New York, New York 10017 New York, New York 10005
(212) 687-7000 (212) 809-8550
Approximate date of proposed sale to the public: As soon as practicable after
this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under
the Securities Act of 1933, please check the following box. |X|
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for
the same offering. | |
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier
registration statement for the same offering. | |
If the delivery of the prospectus is expected to be made pursuant
to Rule 434, please check the following box. | |
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<PAGE>
Pursuant to Rule 416 under the Securities Act of 1933, as amended, there
are also being registered such additional shares of Common Stock as may become
issuable pursuant to anti-dilution provisions upon exercise of the Warrants and
the Unit Purchase Option.
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
EXPLANATORY NOTE
This Registration Statement covers the registration of (i) up to 1,380,000
units ("Units"), including Units to cover over-allotments, if any, each Unit
consisting of one share of Common Stock, $.01 par value ("Common Stock"), of
Heuristic Development Group, Inc., a Delaware corporation (the "Company"), one
redeemable Class A Warrant ("Class A Warrant") and one redeemable Class B
Warrant ("Class B Warrant"), for sale by the Company in an underwritten public
offering and (ii) an additional 500,000 Class A Warrants (the "Selling
Securityholder Warrants"), for sale by the holders thereof (the "Selling
Securityholders"), 500,000 Class B Warrants (the "Selling Securityholder Class B
Warrants") underlying the Selling Securityholder Warrants and 1,000,000 shares
of Common Stock (the "Selling Securityholder Stock") underlying the Selling
Securityholder Warrants and the Selling Securityholder Class B Warrants, all for
resale from time to time by the Selling Securityholders subject to the
contractual restriction that the Selling Securityholders may not sell the
Selling Securityholder Warrants for specified periods after the closing of the
underwritten offering. The Selling Securityholder Warrants, the Selling
Securityholder Class B Warrants and the Selling Securityholder Stock are
sometimes collectively referred to herein as the "Selling Securityholder
Securities."
The complete Prospectus relating to the underwritten offering follows
immediately after this Explanatory Note. Following the Prospectus for the
underwritten offering are pages of the Prospectus relating solely to the Selling
Securityholder Securities, including alternative front and back cover pages and
sections entitled "Concurrent Public Offering," "Plan of Distribution," and
"Selling Securityholders" to be used in lieu of the sections entitled
"Concurrent Offering" and "Underwriting" in the Prospectus relating to the
underwritten offering. The "Dilution" section of the Prospectus for the
underwritten offering will not be used in the Prospectus relating to the Selling
Securityholder Securities.
ii
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION -- DATED JANUARY 31, 1997
PROSPECTUS
HEURISTIC DEVELOPMENT GROUP, INC.
1,200,000 Units Consisting of 1,200,000 Shares of
Common Stock, 1,200,000 Redeemable Class A
Warrants and 1,200,000 Redeemable Class B Warrants
Each unit ("Unit") offered by Heuristic Development Group, Inc. (the
"Company") consists of one share of common stock, $.01 par value ("Common
Stock"), one redeemable class A warrant ("Class A Warrants") and one redeemable
class B warrant ("Class B Warrants"). The components of the Units will be
transferable separately immediately upon issuance. Each Class A Warrant entitles
the holder to purchase one share of Common Stock and one Class B Warrant at an
exercise price of $6.50, subject to adjustment, at any time until the fifth
anniversary of the date of this Prospectus. Each Class B Warrant entitles the
holder to purchase one share of Common Stock at an exercise price of $8.75,
subject to adjustment, at any time until the fifth anniversary of the date of
this Prospectus. Commencing one year from the date hereof, the Class A Warrants
and Class B Warrants (collectively, the "Warrants") are subject to redemption by
the Company at a redemption price of $.05 per Warrant on 30 days' written
notice, provided the closing bid price of the Common Stock averages in excess of
$9.10 and $12.25 per share, respectively, for any 30 consecutive trading days
ending within 15 days of the notice of redemption. See "Description of
Securities."
The registration statement of which this Prospectus is a part also covers
the offering for resale by certain securityholders (the "Selling
Securityholders") of 500,000 Class A Warrants (the "Selling Securityholder
Warrants"), and the Common Stock and Class B Warrants underlying the Selling
Securityholder Warrants and the Common Stock issuable upon exercise of such
Class B Warrants. See "Concurrent Offering." The Selling Securityholder Warrants
and the securities underlying such Warrants are sometimes collectively referred
to as the "Selling Securityholder Securities." The Selling Securityholder
Warrants are issuable on the closing of the Offering to the Selling
Securityholders upon the automatic conversion of warrants (the "Bridge
Warrants") acquired by them in the Company's private placement in December 1996
(the "Bridge Financing"). The Selling Securityholders have agreed not to
exercise, sell, transfer, hypothecate, assign or otherwise dispose of the
Selling Securityholder Warrants for one year after the closing of the Offering.
Sales of the Selling Securityholder Warrants or the underlying securities, or
the potential of such sales, may have an adverse effect on the market price of
the securities offered hereby.
Prior to this offering (the "Offering"), there has been no public market
for the Units, Common Stock or Warrants and there can be no assurance that such
a market will develop. The Company has applied for quotation of the Units,
Common Stock, Class A Warrants and Class B Warrants on the Nasdaq SmallCap
Market ("Nasdaq") under the symbols IFITU, IFIT, IFITW and IFITZ, respectively.
See "Underwriting" for a discussion of factors considered in determining the
initial public offering price. For information concerning a Securities and
Exchange Commission investigation relating to the Underwriter, see "Risk
Factors" and "Underwriting."
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND
IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS"
BEGINNING ON PAGE 6 AND "DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
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Underwriting Discounts Proceeds to
Price to Public and Commissions (1) Company (2)
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<S> <C> <C> <C>
Per Unit ........................................... $5.00 $.50 $4.50
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Total (3) .......................................... $6,000,000 $600,000 $5,400,000
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</TABLE>
(1) Does not include additional compensation to be received by the Underwriter
in the form of (i) a non-accountable expense allowance of $180,000, or $.15
per Unit ($207,000 if the over-allotment option is exercised in full); and
(ii) an option, exercisable over a period of three years commencing two
years from the date of this Prospectus, to purchase up to 108,000 Units at
$6.00 per Unit (the "Unit Purchase Option"). The Company has also agreed to
indemnify the Underwriter against certain liabilities under the Securities
Act of 1933, as amended. The Underwriter has agreed to pay Marc J. Gorlin,
as finder (the "Finder"), $10,000 and the Company has agreed to issue the
Finder an option, exercisable over a period of three years commencing two
years from the date of this Prospectus, to purchase up to 12,000 Units at
$6.00 per Unit (the "Finder's Unit Purchase Option"). See "Underwriting."
(2) Before deducting estimated expenses of $625,000 payable by the Company,
including the Underwriter' s non-accountable expense allowance.
(3) The Company has granted to the Underwriter a 30-day option to purchase up
to 180,000 additional Units on the same terms and conditions as set forth
above, solely to cover over-allotments, if any. If the over-allotment
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $6,900,000,
$690,000 and $6,210,000, respectively. See "Underwriting."
------------
The Units are being offered on a "firm commitment" basis by the Underwriter
when, as and if delivered to and accepted by the Underwriter, subject to its
right to reject orders in whole or in part and subject to certain other
conditions. It is expected that the delivery of the certificates representing
the Units will be made against payment at the offices of D.H. Blair Investment
Banking Corp., 44 Wall Street, New York, New York on or about , 1997.
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D.H. BLAIR INVESTMENT BANKING CORP.
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The date of this Prospectus is , 1997
<PAGE>
[Pictures]
Series of pictures depicting usage of the IntelliFit Personal Trainer; the
workout form and a sketch of a kiosk along with a narrative description of the
software.
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by its independent auditors.
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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE UNITS, COMMON
STOCK AND/OR THE WARRANTS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN
THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME.
<PAGE>
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial
statements (including the notes thereto) appearing elsewhere in this Prospectus.
Except as otherwise noted, all information in this Prospectus (i) reflects a
1,339.4362-for-one stock split effected in October 1996; (ii) assumes no
exercise of (a) the Underwriter's over-allotment option; (b) the Warrants; (c)
the Selling Securityholder Warrants; (d) the Unit Purchase Option or the
Finder's Unit Purchase Option; (e) options granted or available for grant under
the Company's stock option plan; or (f) options granted outside of the Company's
stock option plan; and (iii) gives effect to the conversion, on completion of
the Offering, of (a) the Bridge Warrants into the Selling Securityholder
Warrants; (b) all outstanding shares of the Company's Series A preferred stock,
$.01 par value ("Series A Preferred Stock"), into Common Stock; and (c) certain
outstanding indebtedness into equity of the Company. See "Management -- Stock
Option Plan," "Certain Transactions" and "Description of Securities."
The Company
The Company is engaged in the development, marketing and sale of the
IntelliFit System, a computerized system which generates personalized exercise
prescriptions based on, among other things, an individual's weight, ability,
medical history, goals, fitness level and exercise preferences and tracks and
records fitness progress. The IntelliFit System interacts with a user by
applying algorithms to an individual's personal profile and adjusting a user's
exercise prescription based on progress, frequency of workouts and other
variables. The Company believes that this interactive feature helps motivate
users to continue exercising, and allows users to reach their goals more
quickly.
The IntelliFit System operates from a freestanding kiosk which houses
off-the-shelf computer hardware purchased from major equipment manufacturers,
including a computer with a touch screen display, a modem used to communicate
with a central database, a motorized smart card reader, a scanner and a printer.
The IntelliFit System is accessed by a smart card, similar in size to a credit
card, which contains a microprocessor chip which is able to store information in
memory (the "IntelliCard").
The Company's strategy is to market and sell the IntelliFit System
initially in selected United States markets. The Company's first target markets
are military facilities, commercial clubs, hospital facilities, corporate
facilities, insurance companies and health maintenance organizations. The
Company believes that these markets have the greater user concentration and that
penetration of these markets would help establish the Company's credibility in
other markets. Subsequent target markets include universities, schools,
government facilities and resorts. The Company expects to add enhancements to
the IntelliFit System to enable the System to serve the rehabilitation market.
This will enable patients who exercise as part of their rehabilitation program
to use the System to follow their exercise program in a local fitness center. In
addition, the Company intends to explore other markets for the IntelliFit
software, including selling the software as an individually packaged product for
use on personal computers and providing the software to Internet users.
The original computer source programs and related documentation and
computerized services and instructional material (collectively, the "EIS
System") on which the IntelliFit System is based was developed for Nautilus
Group Japan, Ltd. ("NGJ Ltd."), a Delaware company operating in Japan. The
Company acquired the rights to the EIS System from NGJ Ltd. in August 1994 and
spent approximately two years modifying and expanding upon the EIS System in
order to create the IntelliFit System. NGJ Ltd. has advised the Company that the
EIS System is currently installed in nine facilities in Japan and has generated
over 7 million individualized exercise prescriptions.
To date, the Company has been engaged primarily in research and development
activities relating to the IntelliFit System and has conducted only limited
marketing activities. The Company believes that product development necessary to
initiate commercial sales has been substantially completed alhough development
efforts aimed at enhancements and upgrades will be ongoing. The Company has
generated only nominal revenues from product sales and there can be no assurance
that the Company will successfully commercialize the IntelliFit System, generate
any significant revenues or ever achieve profitable operations.
The Company was incorporated in Delaware in July 1994. The Company's
executive offices are located at 17575 Pacific Coast Highway, Pacific Palisades,
California 90272 and its telephone number is (310) 230-3394.
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3
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The Offering
Securities Offered................... 1,200,000 Units, each Unit consisting of
one share of Common Stock, one Class A
Warrant and one Class B Warrant. Each
Class A Warrant entitles the holder to
purchase one share of Common Stock and
one Class B Warrant at an exercise price
of $6.50, subject to adjustment, at any
time until the fifth anniversary of the
date of this Prospectus. Each Class B
Warrant entitles the holder to purchase
one share of Common Stock at an exercise
price of $8.75, subject to adjustment,
at any time until the fifth anniversary
of the date of this Prospectus. The
Warrants are subject to redemption in
certain circumstances. See "Description
of Securities."
Securities Offered Concurrently by
Selling Securityholders............ 500,000 Class A Warrants; 500,000 Class
B Warrants issuable upon exercise of
these Class A Warrants and 1,000,000
shares of Common Stock issuable upon
exercise of these Class A Warrants and
Class B Warrants. See "Concurrent
Offering."
Common Stock Outstanding Before
Offering........................... 800,000 shares (1)
Common Stock Outstanding After
Offering.......................... 2,000,000 shares (1)
Use of Proceeds and Plan of
Operations........................ To repay $1,000,000 principal amount of
10% promissory notes (the "Bridge
Notes") issued in the Bridge Financing;
to repay approximately $170,000
principal amount of working capital
advances from stockholders of the
Company, including executive officers
and directors of the Company, (the
"Stockholder Advances"); for capital
expenditures; for research and
development; for sales and marketing;
and for working capital. See "Use of
Proceeds and Plan of Operations."
Proposed Nasdaq Symbols (2)
Units .............................. IFITU
Common Stock: ...................... IFIT
Class A Warrants: .................. IFITW
Class B Warrants: .................. IFITZ
Risk Factors........................ The Offering involves a high degree of
risk and immediate substantial dilution.
See "Risk Factors" and "Dilution."
- --------
(1) Includes 349,370 shares of Common Stock (the "Escrow Shares") and options
to purchase 78,674 shares of Common Stock at $.50 per share, of which
options to purchase 50,630 shares (the "Escrow Options") have been
deposited into escrow by the holders thereof. The Escrow Shares and Escrow
Options are subject to cancellation and will be contributed to the capital
of the Company if the Company does not attain certain earnings levels or
the market price of the Company's Common Stock does not achieve certain
levels. If such earnings or market price levels are met, the Company will
record a substantial non-cash charge to earnings, for financial reporting
purposes, as compensation expense relating to the value of the Escrow
Shares and Escrow Options released to Company officers and employees. See
"Risk Factors-Charge to Income in the Event of Release of Escrowed Shares
and Options and as a Result of Issuance of Options," "Capitalization" and
"Principal Stockholders."
(2) Notwithstanding quotation on Nasdaq, there can be no assurance that an
active trading market for the Company's securities will develop or, if
developed, that it will be sustained. See "Risk Factors -- No Public Market
for Securities; Possible Volatility of Market Price; Arbitrary
Determination of Offering Price."
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4
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Summary Financial Information
<TABLE>
<CAPTION>
July 20, 1994
Nine Months (Commencement
Year Ended Ended of Operations) through
December 31, 1995 September 30, September 30, 1996
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1995 1996
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Statement of Operations Data:
Research and development expenses............. $397,000 $227,000 $ -- $ 475,000
General and administrative expenses........... 466,000 418,000 808,000 1,433,000
Net loss...................................... (876,000) (647,000) (850,000) (1,956,000)
Pro forma net loss per share(1)............... $ (2.31) $ (2.17)
Shares used in computing pro forma
net loss per share(1)......................... 371,956 371,956
<CAPTION>
At September 30, 1996
-------------------------------------------------
Actual Pro Forma(2) As Adjusted(3)
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Balance Sheet Data:
Working capital (deficit)..................... $ (413,000) $ 845,000 $4,492,000
Total assets.................................. 571,000 1,711,000 5,137,000
Total current liabilities..................... 436,000 158,000 158,000
Deficit accumulated
during development stage.................... (1,956,000) (2,078,000) (2,757,000)
Total stockholders' equity
(capital deficiency)........................ $ (701,000) $ 883,000 $4,979,000
</TABLE>
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(1) The pro forma net loss per share computation gives retroactive effect to
the conversion on completion of the Offering of (i) $1,083,713 of
outstanding indebtedness at August 31, 1996, plus accrued interest thereon
(the "Stockholder Debt") into 263,921 shares of the Company's Common Stock
and (ii) the Series A Preferred Stock and accrued dividends thereon
aggregating $722,000 into 175,793 shares of Common Stock, and excludes the
Escrow Shares and Escrow Options. See "Certain Transactions" and Notes A,
B(4) and I of Notes to Financial Statements.
(2) Gives pro forma effect to (i) the issuance of the Bridge Notes and the
Bridge Warrants subsequent to September 30, 1996; (ii) working capital
advances from stockholders aggregating $140,000 subsequent to September 30,
1996; and (iii) the conversion of the Stockholder Debt and the Series A
Preferred Stock into Common Stock upon completion of the Offering. See
"Capitalization-Bridge Financing," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Certain Transactions."
(3) Adjusted to give effect to the sale of the 1,200,000 Units offered hereby,
the receipt of the net proceeds therefrom and the use of a portion of the
net proceeds to repay the Stockholder Advances and the Bridge Notes and the
corresponding charge to operations through the date of repayment of
$660,000, representing debt discount and debt issuance costs associated
with the Bridge Financing. See "Use of Proceeds and Plan of Operations" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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5
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RISK FACTORS
The Units offered hereby are speculative in nature and an investment in the
Units offered hereby involves a high degree of risk. Prospective investors are
cautioned that the statements in this Prospectus that are not historical facts
may be forward-looking statements that are subject to risks and uncertainties,
including those set forth below. In addition to the other information contained
in this Prospectus, prospective investors should carefully consider the
following risk factors in evaluating whether to purchase the Units offered
hereby.
History of Operating Losses; Need for Additional Financing. The Company has
experienced significant operating losses since it commenced operations in July
1994. As of September 30, 1996, the Company's accumulated deficit was
$(1,956,000). The Company anticipates incurring substantial and increasing
operating losses over the near term and possibly over the next several years.
Such losses have been and will continue to be principally the result of the
various costs associated with the Company's research and development and sales
and marketing activities. In addition, the Company's business is very capital
intensive, requiring substantial outlays for the purchase of kiosks and
hardware. The Company believes that the net proceeds from the Offering, together
with its existing capital resources, will enable it to fund its operations for
approximately 18 months following completion of the Offering. The Company will
be required to seek additional financing to continue its research, development,
design, sales and marketing activities beyond such time and to commercialize the
IntelliFit System on a large scale. The Company has no commitments for any
future funding and there can be no assurance that the Company will be able to
obtain additional financing in the future from either debt or equity financings,
bank loans, collaborative arrangements or other sources on acceptable terms. If
the Company is unable to obtain the necessary financing, it will be required to
significantly curtail its activities or cease operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Financial Statements.
Early Stage of Company. Although the Company was organized in July 1994,
management has focused on research and development activities and on limited
sales and marketing activities and has generated only nominal revenues to date
from product sales. The Company may experience many of the delays, uncertainties
and complications typically encountered by newly established businesses, many of
which may be beyond the Company's control. These include, but are not limited
to, unanticipated problems relating to product development, testing,
manufacturing, marketing and competition, and additional costs and expenses that
may exceed current estimates. There can be no assurance that the Company will
successfully commercialize its product, generate any significant revenues or
ever achieve profitable operations. See "Business -- General" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Dependence Upon One Product. The Company's business is currently dependent
upon sales of one product. Innovative products are often not successful and
successful products are often displaced by the introduction of competitive
products. To date, the IntelliFit System has been installed on a test basis in
only six sites. Although the preliminary response generally has indicated
satisfaction with the product, there can be no assurance that such tests will
result in significant purchase contracts. In the event that the Company is not
able to successfully market and sell the IntelliFit System, this would have a
material adverse effect on the Company. See "Business -- General."
Going Concern Qualification in Independent Auditors' Report. The Company
has received a report from its independent auditors that includes an explanatory
paragraph that describes the substantial doubt as to the ability of the Company
to continue as a going concern. See "Report of Independent Auditors" and Note A
to the Financial Statements.
Uncertainty of Market Acceptance of IntelliFit System. The success of the
Company's business is dependent upon acceptance of the IntelliFit System by both
the Company's potential customers and the actual users of the system. There can
be no assurance that acceptance by any of the Company's potential customers will
occur. In addition, even if the IntelliFit System is installed in a fitness
center, ultimate success for the Company depends on whether individuals actually
use the system on a regular basis. The Company does not market its product
directly to these users and has limited ability to monitor the manner and
frequency with which fitness center staff introduce the IntelliFit System to new
members or renewing members or stimulate current members' interest in using and
continuing to use the IntelliFit System. A number of companies that have
developed computer-based fitness systems which prescribe personalized exercise
programs have either had limited success or have failed. See "Business --
Marketing."
Potential Development Problems; Potential Hardware Problems. To date the
Company has installed kiosks in only six fitness centers on a test basis. There
can be no assurance that the IntelliFit System will perform as anticipated. In
addition, the software embodied in the IntelliFit System may contain errors
which only become apparent subsequent to widespread commercial use. The
IntelliFit System may require improvements and refinements.
6
<PAGE>
Difficulties in improving and refining the IntelliFit System could delay further
introductions and installations of the System and could cause the Company to
incur additional costs. In addition, the guidelines and parameters allowing safe
progression and improvement for users which form the basis for the IntelliFit
System may be changed or updated which would require a change in the software
embodied in the system. This could have a material adverse effect on the
Company. In addition, technical problems with computer hardware could cause
operation of the IntelliFit System at any location to be temporarily suspended.
See "Business-Marketing" and "Business -- Services."
Competition. The Company competes with companies that have developed
computer-based fitness systems which prescribe personalized exercise programs.
The Company will attempt to compete on the basis of cost, features offered, ease
of use, time spent at the kiosks and service; however, there is no assurance
that the Company will be able to compete successfully with its competitors.
Certain of the Company's competitors have substantially greater financial,
marketing, technical, distribution and other resources and greater name
recognition than the Company. In addition, unlike the Company, certain
competitors have a relationship with companies that manufacture exercise
equipment. The Company may also face competition from new companies that develop
similar products to the IntelliFit System. There can be no assurance that
enhancements to or future generations of competitive products will not be
developed which offer superior prices, more attractive features, easier use
and/or better service than the Company's products. See "Business-Competition."
Dependence on Sole or Limited Sources of Supply. The IntelliFit System
operates from a freestanding kiosk which houses off-the-shelf computer hardware
purchased from major equipment manufacturers. The Company does not intend to
manufacture the kiosks or any of the hardware components of the IntelliFit
System. The kiosks are off-the-shelf products with certain modifications and are
currently manufactured for the Company by one manufacturer. There can be no
assurance that future deliveries of kiosks will be completed on a timely basis.
Failure by the manufacturer to supply the Company with high quality finished
products on commercially reasonable terms, or at all, could have a material
adverse effect on the Company.
The Company purchases its hardware from several suppliers. The failure or
delay of current or alternate suppliers in supplying product to the Company
could result in delays in marketing or operation of the IntelliFit System, which
would have a material adverse effect on the Company. In addition, a change in
certain pieces of hardware could require revisions to the software which could
have a material adverse effect on the Company. The Company currently has only
one written contract with a software developer for the provision of future
development services. Currently, the Company has limited capability internally
to perform upgrades or modifications to the software and there can be no
assurance that any required upgrades or modifications to the software can be
successfully made. This could have a material adverse effect on the Company. See
"Business-Manufacturing and Development," "Principal Stockholders,"
"Management-Executive Officers and Directors."
Dependence on Key Personnel. The Company is highly dependent on the
principal members of its management, including Steven R. Gumins, the Chief
Executive Officer of the Company, and Deborah E. Griffin, the Chief Operating
Officer of the Company. The Company has an employment agreement with each of Mr.
Gumins and Ms. Griffin and has obtained a $2,000,000 key person life insurance
policy covering Mr. Gumins' life. The Company is the sole beneficiary of such
life insurance policy. The Company will not be able to obtain key person life
insurance on Deborah Griffin's life in view of health problems affecting Ms.
Griffin. Such health problems are not expected to affect her ability to carry
out her duties and responsibilities on a full-time basis. The future success of
the Company depends in large part upon its ability to attract and retain highly
qualified personnel. Competition for such personnel is intense and there can be
no assurance that the Company will be able to hire sufficient qualified
personnel on a timely basis or retain such personnel in the future. The loss of
such personnel or the failure to recruit additional key personnel by the Company
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business-Employees" and "Management."
Potential Product Liability Claims; Insufficiency of Insurance. The
provision of personalized exercise programs may subject the Company to liability
claims of bodily injury and/or property damage to its customers and the ultimate
users of the IntelliFit System and there can be no assurance that the Company
will be able to maintain insurance sufficient to cover any or all claims against
the Company which may arise. If the Company's insurance is insufficient, this
could have a material adverse effect on the Company. See "Business --
Insurance."
Use of Proceeds to Benefit Insiders. An aggregate of approximately
$175,000(3.7%) of the net proceeds of the Offering will be used to repay
principal and accrued interest on the Stockholder Advances made by Steven R.
Gumins, Chief Executive Officer of the Company, Deborah E. Griffin, Chief
Operating Officer of the Company, Jonathan W. Seybold, Chairman of the Board of
the Company, NGJ, Ltd., a principal stockholder of the Company,
7
<PAGE>
and Dr. William Blase, a director of the Company. See "Use of Proceeds and Plan
of Operations," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Certain Transactions."
Charges Arising from Debt Issuance Costs. Upon completion of the Offering
and repayment of the Bridge Notes, a non-recurring charge representing the
unamortized debt discount and debt issuance costs incurred in connection with
the Bridge Financing will be charged to operations in the quarter in which the
Offering is completed. The aggregate debt discount and debt issue costs
associated with the Bridge Notes is $660,000. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Charge to Earnings in the Event of Release of Escrowed Shares and Options.
The Securities and Exchange Commission (the "Commission") has taken the position
with respect to escrow arrangements such as that entered into by the Company and
its stockholders that in the event any shares are released from escrow to the
holders who are officers, directors, employees or consultants of the Company, a
compensation expense will be recorded for financial reporting purposes.
Accordingly, in the event of the release of the Escrow Shares and Escrow
Options, the Company will recognize during the period in which the earnings
thresholds are probable of being met or such stock levels achieved, a
substantial noncash charge to earnings equal to the fair market value of such
shares on the date of their release, which would have the effect of
significantly increasing the Company's loss or reducing or eliminating earnings,
if any, at such time. The recognition of such compensation expense may have a
depressive effect on the market price of the Company's securities. Such charge
will not be deductible for income tax purposes. Notwithstanding the foregoing
discussion, there can be no assurance that the Company will attain the targets
which would enable the Escrow Shares and Escrow Options to be released from
escrow. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations, Management -- Stock Option Plan" and "Description of
Securities."
Immediate Dilution. The purchasers of the Units in the Offering will incur
an immediate dilution of approximately $2.44 or 49% in the pro forma per share
net tangible book value of their Common Stock ($2.39 or 48% if the Underwriter's
over-allotment option is exercised in full). Additional dilution to public
investors, if any, may result to the extent that the Warrants, the Underwriter's
Unit Purchase Option and the Finder's Unit Purchase Option and/or outstanding
options are exercised at a time when the net tangible book value per share of
Common Stock exceeds the exercise price of any such securities. See "Dilution."
Potential Adverse Effects of Preferred Stock. The Company's Certificate of
Incorporation authorizes the issuance of shares of "blank check" preferred
stock, which will have such designations, rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the Board
of Directors will be empowered, without stockholder approval (but subject to
applicable government regulatory restrictions), to issue preferred stock with
dividend, liquidation, conversion, voting or other rights which could adversely
affect the voting power or other rights of the holders of the Common Stock. In
the event of such issuance, the preferred stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
control of the Company. Although the Company has no present intention to issue
any shares of preferred stock, there can be no assurance that the Company will
not do so in the future. See "Description of Securities -- Preferred Stock."
No Dividends. The Company has not paid any cash dividends on its Common
Stock and does not expect to declare or pay any cash or other dividends in the
foreseeable future. See "Dividend Policy."
No Public Market for Securities; Possible Volatility of Market Price;
Arbitrary Determination of Offering Price. Prior to the Offering, there has not
been any market for any of the Company's securities, and there can be no
assurance that an active trading market will develop or be sustained after the
Offering. The initial public offering price of the Units and the exercise prices
and other terms of the Warrants have been determined by negotiation between the
Company and the Underwriter pursuant to Schedule E of the By-laws of the NASD
and are not necessarily related to the Company's asset value, net worth, results
of operations or any other criteria of value and may not be indicative of the
prices that may prevail in the public market. The market prices of the Units,
Common Stock and Warrants could also be subject to significant fluctuations in
response to variations in the Company's development efforts, intellectual
property position, government regulations, general trends in the industry and
other factors, including extreme price and volume fluctuations which have been
experienced by the securities markets from time to time. See "Underwriting."
Outstanding Warrants and Options; Exercise of Registration Rights. Upon
completion of the Offering, the Company will have outstanding (i) 1,200,000
Class A Warrants to purchase an aggregate of 1,200,000 shares of
8
<PAGE>
Common Stock and 1,200,000 Class B Warrants; (ii) 1,200,000 Class B Warrants to
purchase 1,200,000 shares of Common Stock; (iii) the Selling Securityholder
Warrants to purchase 500,000 shares of Common Stock and 500,000 Class B
Warrants; (iv) the Unit Purchase Option and Finder's Unit Purchase Option to
purchase an aggregate of 480,000 shares of Common Stock, assuming exercise of
the underlying Warrants; and (v) outstanding options (including the Escrow
Options) to purchase 78,674 shares of Common Stock granted outside of the
Company's 1996 Stock Option Plan. The Company also has 250,000 shares of Common
Stock reserved for issuance upon exercise of options under its 1996 Stock Option
Plan, 200,000 of which have been granted. Holders of such warrants and options
are likely to exercise them when, in all likelihood, the Company could obtain
additional capital on terms more favorable than those provided by warrants and
options. Further, while these warrants and options are outstanding, the
Company's ability to obtain additional financing on favorable terms may be
adversely affected. The holders of the Unit Purchase Option and Finder's Unit
Purchase Option have certain demand and/or "piggy-back" registration rights with
respect to their securities. Exercise of such rights could involve substantial
expense to the Company. See "Management-Stock Option Plan," "Principal
Stockholders," "Description of Securities" and "Underwriting."
Potential Adverse Effect of Redemption of Warrants. Commencing one year
from the date of this Prospectus, the Warrants may be redeemed by the Company at
a redemption price of $.05 per Warrant upon not less than 30 days' prior written
notice if, with respect to the Class A Warrants, the closing bid price of the
Common Stock shall have averaged in excess of $9.10 per share and, with respect
to the Class B Warrants, $12.25 per share, in each instance for 30 consecutive
trading days ending within 15 days of the notice. Redemption of the Warrants
could force the holders (i) to exercise the Warrants and pay the exercise price
therefor at a time when it may be disadvantageous for the holders to do so, (ii)
to sell the Warrants at the then current market price when they might otherwise
wish to hold the Warrants, or (iii) to accept the nominal redemption price
which, at the time the Warrants are called for redemption, is likely to be
substantially less than the market value of the Warrants. See "Description of
Securities-Redeemable Warrants."
Current Prospectus and State Registration to Exercise Warrants. Holders of
Warrants will be able to exercise the Warrants only if (i) a current prospectus
under the Securities Act relating to the securities underlying the Warrants is
then in effect and (ii) such securities are qualified for sale or exempt from
qualification under the applicable securities laws of the states in which the
various holders of Warrants reside. Although the Company has undertaken and
intends to use its best efforts to maintain a current prospectus covering the
securities underlying the Warrants following completion of the Offering to the
extent required by Federal securities laws, there can be no assurance that the
Company will be able to do so. The value of the Warrants may be greatly reduced
if a prospectus covering the securities issuable upon the exercise of the
Warrants is not kept current or if the securities are not qualified, or exempt
from qualification, in the states in which the holders of Warrants reside.
Persons holding Warrants who reside in jurisdictions in which such securities
are not qualified and in which there is no exemption will be unable to exercise
their Warrants and would either have to sell their Warrants in the open market
or allow them to expire unexercised. If and when the Warrants become redeemable
by the terms thereof, the Company may exercise its redemption right even if it
is unable to qualify the underlying securities for sale under all applicable
state securities laws. See "Description of Securities-Redeemable Warrants."
Possible Adverse Effect on Liquidity of the Company's Securities Due to the
Investigation of D.H. Blair Investment Banking Corp. and D.H. Blair & Co., Inc.
by the Securities and Exchange Commission. The Commission is conducting an
investigation concerning various business activities of the Underwriter and D.H.
Blair & Co., Inc. ("Blair & Co."), a selling group member which will distribute
substantially all of the Units offered hereby. The investigation appears to be
broad in scope, involving numerous aspects of the Underwriter's and Blair &
Co.'s compliance with the Federal securities laws and compliance with the
Federal securities laws by issuers whose securities were underwritten by the
Underwriter or Blair & Co., or in which the Underwriter or Blair & Co. made
over-the-counter markets, persons associated with the Underwriter or Blair &
Co., such issuers and other persons. The Company has been advised by the
Underwriter that the investigation has been ongoing since at least 1989 and that
it is cooperating with the investigation. The Underwriter cannot predict whether
this investigation will ever result in any type of formal enforcement action
against the Underwriter or Blair & Co., or, if so, whether any such action might
have an adverse effect on the Underwriter or the securities offered hereby. The
Company has been advised that Blair & Co. intends to make a market in the
securities following the Offering. An unfavorable resolution of the Commission's
investigation could have the effect of limiting such firm's ability to make a
market in the Company's securities, which could adversely affect the liquidity
or price of such securities. See "Underwriting."
9
<PAGE>
Possible Restrictions on Market-Making Activities in Company's Securities.
The Underwriter has advised the Company that Blair & Co. intends to make a
market in the Company's securities. Regulation M, which was recently adopted to
replace Rule 10b-6 and certain other rules promulgated under the Securities Act
of 1934, as amended (the "Exchange Act"), may prohibit Blair & Co. from engaging
in any market-making activities with regard to the Company's securities for the
period from five business days (or such other applicable period as Regulation M
may provide) prior to any solicitation by the Underwriter of the exercise of
Warrants until the later of the termination of such solicitation activity or the
termination (by waiver or otherwise) of any right that the Underwriter may have
to receive a fee for the exercise of Warrants following such solicitation. As a
result, Blair & Co. may be unable to provide a market for the Company's
securities during certain periods while the Warrants are exercisable. In
addition, under applicable rules and regulations under the Exchange Act, any
person engaged in the distribution of the Selling Securityholder Warrants may
not simultaneously engage in market-making activities with respect to any
securities of the Company for the applicable "cooling off" period prior to the
commencement of such distribution. Accordingly, in the event the Underwriter or
Blair & Co. is engaged in a distribution of the Selling Securityholder Warrants,
neither of such firms will be able to make a market in the Company's securities
during the applicable restrictive period. Any temporary cessation of such
market-making activities could have an adverse effect on the market price of the
Company's securities. See "Underwriting."
Possible Delisting of Securities from the Nasdaq Stock Market. While the
Company's Units, Common Stock, Class A Warrants and Class B Warrants meet the
current Nasdaq listing requirements and are expected to be initially included on
the Nasdaq SmallCap Market, there can be no assurance that the Company will meet
the criteria for continued listing. Continued inclusion on Nasdaq generally
requires that (i) the Company maintain at least $2,000,000 in total assets and
$1,000,000 in capital and surplus, (ii) the minimum bid price of the Common
Stock be $1.00 per share, (iii) there be at least 100,000 shares in the public
float valued at $200,000 or more, (iv) the Common Stock have at least two active
market makers, and (v) the Common Stock be held by at least 300 holders.
Nasdaq has recently proposed more stringent financial requirements for
listing on Nasdaq. With respect to continued listing, such new requirements are
(i) either at least $2,000,000 in tangible assets, a $35,000,000 market
capitalization or net income of at least $500,000 in two of the three prior
years, (ii) at least 500,000 shares in the public float valued at $1,000,000 or
more, (iii) a minimum Common Stock bid price of $1.00, (iv) at least two active
market makers, and (v) at least 300 holders of the Common Stock. If adopted, the
Company will have to meet and maintain such new requirements. If the Company is
unable to satisfy Nasdaq's maintenance requirements, its securities may be
delisted from Nasdaq. In such event, trading, if any, in the Units, Common Stock
and Warrants would thereafter be conducted in the over-the-counter market in the
so-called "pink sheets" or the NASD's "Electronic Bulletin Board." Consequently,
the liquidity of the Company's securities could be impaired, not only in the
number of securities which could be bought and sold, but also through delays in
the timing of transactions, reduction in security analysts' and the news media's
coverage of the Company and lower prices for the Company's securities than might
otherwise be attained.
Risks of Low-Priced Stock. If the Company's securities were delisted from
Nasdaq (See "Possible Delisting of Securities from the Nasdaq Stock Market"),
they could become subject to Rule 15g-9 under the Exchange Act, which imposes
additional sales practice requirements on broker-dealers which sell such
securities to persons other than established customers and "accredited
investors" (generally, individuals with net worths in excess of $1,000,000 or
annual incomes exceeding $200,000, or $300,000 together with their spouses). For
transactions covered by this rule, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to sale. Consequently, such rule may
adversely affect the ability of broker-dealers to sell the Company's securities
and may adversely affect the ability of purchasers in the Offering to sell in
the secondary market any of the securities acquired hereby.
Commission regulations define a "penny stock" to be any non-Nasdaq equity
security that has a market price (as therein defined) of less than $5.00 per
share or with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require delivery, prior to any transaction in a penny stock, of a
disclosure schedule prepared by the Commission relating to the penny stock
market. Disclosure is also required to be made about commissions payable to both
the broker-dealer and the registered representative and current quotations for
the securities. Finally, monthly statements are required to be sent disclosing
recent price information for the penny stock held in the account and information
on the limited market in penny stocks.
10
<PAGE>
The foregoing required penny stock restrictions will not apply to the
Company's securities if such securities are listed on Nasdaq and have certain
price and volume information provided on a current and continuing basis or meet
certain minimum net tangible assets or average revenue criteria. There can be no
assurance that the Company's securities will qualify for exemption from these
restrictions. In any event, even if the Company's securities were exempt from
such restrictions, it would remain subject to Section 15(b)(6) of the Exchange
Act, which gives the Commission the authority to prohibit any person that is
engaged in unlawful conduct while participating in a distribution of a penny
stock from associating with a broker-dealer or participating in a distribution
of a penny stock, if the Commission finds that such a restriction would be in
the public interest. If the Company's securities were subject to the rules on
penny stocks, the market liquidity for the Company's securities could be
severely adversely affected.
Shares Eligible for Future Sale. Future sales of Common Stock by existing
stockholders pursuant to Rule 144 under the Securities Act, pursuant to the
Concurrent Offering or otherwise, could have an adverse effect on the price of
the Company's securities. Pursuant to the Concurrent Offering, 500,000 Selling
Securityholder Warrants and the underlying securities have been registered for
resale concurrently with the Offering, subject to a contractual restriction that
the Selling Securityholders not sell any of the Selling Securityholder Warrants
for one year from the closing of the Offering. The shares outstanding prior to
the Offering will be eligible for sale under Rule 144 at various times beginning
90 days after the date of this Prospectus. An additional 78,674 shares of Common
Stock underlying vested options issued outside of the Company's stock option
plan will be eligible for resale pursuant to Rules 144 and/or 701 under the
Securities Act (subject to the restrictions on transfer applicable to the Escrow
Shares and Escrow Options) beginning 90 days after the date of this Prospectus.
However, holders of all of the outstanding shares of Common Stock and
outstanding options prior to the Offering have agreed not to sell any shares of
Common Stock for a period of 13 months from the date of this Prospectus without
the prior written consent of the Underwriter. The Underwriter has registration
rights covering its securities. Sales of Common Stock, or the possibility of
such sales, in the public market may adversely affect the market price of the
securities offered hereby. See "Concurrent Offering," "Description of
Securities" and "Shares Eligible for Future Sale."
Possible Conflicts of Interest; Lack of Independent Appraisals for Related
Transactions. Gregory L. Zink, President and a director of the Company, serves
as Chief Operating Officer of NGJ, Ltd., the licensor of the Company's
technology and a principal stockholder of the Company. Kenneth W. Krugler, a
director of the Company, is the President of TransPac Software Inc.
("TransPac"), one of the developers of the software embodied in the Intellifit
System. The Company has entered into agreements with each of NGJ Ltd. and
TransPac. See "Business." The Company did not obtain independent appraisals with
respect to the terms of such arrangements. Actual or potential conflicts of
interest between the Company and its officers and directors may arise with
respect to such business arrangements.
11
<PAGE>
USE OF PROCEEDS AND PLAN OF OPERATIONS
The net proceeds to the Company from the sale of the 1,200,000 Units
offered in the Offering, after deducting underwriting discounts and commissions
and other expenses of the Offering, are estimated to be approximately $4,775,000
($5,558,000 if the Underwriter's over-allotment option is exercised in full).
The Company expects the net proceeds to be utilized approximately as follows:
<TABLE>
<CAPTION>
Approximate Amount Approximate Percent
Application of Net Proceeds of Net Proceeds
----------- --------------- ---------------
<S> <C> <C>
Repayment of Bridge Notes (1) .................... $1,016,500 21.3%
Repayment of Stockholder Advances(2) ............. 175,000 3.7
Capital Expenditures(3) .......................... 755,000 15.8
Research and Development(4) ...................... 875,000 18.3
Sales and Marketing (5) .......................... 725,000 15.2
Working Capital(6) ............................... 1,228,500 25.7
---------- -------
Total ............................................ $4,775,000 100.0%
========== =======
</TABLE>
- --------
(1) Represents the principal amount and accrued interest at the rate of
10% per annum (estimated at approximately $ 16,500 through January 31,
1997) of Bridge Notes issued in the Bridge Financing in December,
1996. The proceeds of the Bridge Financing were and are being used
primarily for working capital purposes. See "Capitalization -- Bridge
Financing" and "Certain Transactions."
(2) Represents the principal amount and accrued interest at the rate of
10% per annum of notes issued to executive officers, directors and a
principal stockholder of the Company between September and December 3,
1996. The proceeds of the Stockholder Advances were and are being used
primarily for working capital purposes. See "Certain Transactions."
(3) Includes costs associated with hardware and purchasing office
equipment.
(4) Includes costs associated with modifications of IntelliFit System for
new markets and the hiring of product development pesonnel.
(5) Includes costs associated with the hiring of additional personnel, the
creation and updating of customer lists, advertising and attendance at
trade shows and other advertising expenses.
(6) Includes general and administrative expenses, including approximately
$450,000 for salaries of the current executive officers during the
next 18 months. See "Management -- Employment Agreements."
The foregoing represents the Company's best estimate of its allocation of the
net proceeds of the Offering during the next 18 months. This estimate is based
on certain assumptions, including that no events occur which would cause the
Company to abandon any particular efforts, that competitive conditions remain
stable, that the success of the Company's research and development and sales and
marketing activities will occur as projected, that the Company does not enter
into collaborations to fund a project separately and that the Company will be
able to obtain equipment financing to fund the purchase of kiosks. Kiosks are
expected to cost approximately $9,000 a piece and the Company does not plan to
maintain an inventory of such products. The amounts actually expended for each
purpose may vary significantly in the event any of these assumptions prove
inaccurate. The Company reserves the right to change its use of proceeds as
unanticipated events may cause the Company to redirect its priorities and
reallocate the proceeds accordingly.
Any additional proceeds received upon exercise of the over-allotment
option, the Warrants or the Selling Securityholder Warrants will be added to
working capital. Pending utilization, the net proceeds of the Offering will be
invested in high-quality short-term, interest-bearing investments.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock and does not
anticipate paying cash dividends in the foreseeable future. The Company
currently intends to retain all earnings, if any, for use in the expansion of
the Company's business. The declaration and payment of future dividends, if any,
will be at the sole discretion of the Board of Directors and will depend upon
the Company's profitability, financial condition, cash requirements, future
prospects and other factors deemed relevant by the Board of Directors.
12
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
September 30, 1996 (after giving retroactive effect to a 1,339.4362-for-one
stock split effected in October 1996); (ii) pro forma as of September 30, 1996
to reflect (a) the sale of the Bridge Notes and Bridge Warrants subsequent to
such date, (b) receipt of a portion of the Stockholder Advances subsequent to
such date and (c) the conversion of the Stockholder Debt into equity and
outstanding Series A Preferred Stock into Common Stock upon completion of the
Offering; and (iii) as adjusted to reflect the sale of the Units offered hereby
and the application of the net proceeds therefrom to repay the Bridge Notes and
the Stockholder Advances. This table should be read in conjunction with the
Financial Statements and the Notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
September 30, 1996
---------------------------------------------
Actual Pro Forma As Adjusted
---------- ---------- -----------
<S> <C> <C> <C>
Bridge Notes, net of discount(1) ............. $ -- $ 500,000 $ --
Notes payable and accrued interest
stockholders, non-current .................. 836,000 170,000 --
Stockholders' Equity(2):
Preferred Stock, $.01 par value;
5,000,000 shares authorized; 600 shares
of Series A Preferred Stock issued and
outstanding actual; no shares issued and
outstanding pro forma and as adjusted .... -- -- --
Common Stock, $.01 par value;
20,000,000 shares authorized 281,612
shares issued and outstanding actual;
721,326 shares issued and outstanding
pro forma; 1,921,326 shares issued and
outstanding as adjusted (3)(4) ............ 3,000 7,000 19,000
Additional paid-in capital .................... 1,252,000 2,954,000 7,717,000
Deficit accumulated during
development stage(5) .......................... (1,956,000) (2,078,000) (2,757,000)
----------- ----------- -----------
Total stockholders' equity
(capital deficiency) .................... (701,000) 883,000 4,979,000
----------- ----------- -----------
Total capitalization .................. $ 135,000 $ 1,553,000 $ 4,979,000
=========== =========== ===========
</TABLE>
- --------
(1) The Bridge Notes are payable on the earlier of December 2, 1997 or the
completion of the Offering. See "Use of Proceeds and Plan of Operations."
(2) Authorized amounts give effect to an amendment to the Company's Certificate
of Incorporation.
(3) Excludes (i) up to 720,000 shares of Common Stock issuable upon exercise of
the Underwriter's over-allotment option and the underlying Warrants; (ii)
3,600,000 shares of Common Stock issuable upon exercise of the Warrants
included in or underlying the Units offered hereby; (iii) 1,000,000 shares
of Common Stock issuable upon exercise of the Selling Securityholder
Warrants and the underlying Warrants; (iv) 480,000 shares of Common Stock
issuable upon exercise of the Unit Purchase Option and the Finder's Unit
Purchase Option and the Warrants included in or underlying such options;
(v) 250,000 shares of Common Stock reserved for issuance under the
Company's 1996 Stock Option Plan, of which 200,000 have been granted and
(vi) 78,674 shares of Common Stock issuable upon exercise of outstanding
options granted outside of the Company's 1996 Stock Option Plan. See
"Management-Stock Option Plan," "Certain Transactions," "Description of
Capital Stock" and "Concurrent Offering."
(4) Includes the 349,370 Escrow Shares. See "Principal Stockholders-Escrowed
Shares and Options."
(5) Gives effect to recognition of $660,000 of expense upon the closing of the
Offering representing debt discount and debt issuance costs relating to the
Bridge Financing and repayment of the Bridge Notes. See "Use of Proceeds
and Plan of Operations" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
13
<PAGE>
Bridge Financing
In December 1996, the Company completed the Bridge Financing of an
aggregate of $1,000,000 principal amount of Bridge Notes and 500,000 Bridge
Warrants in which it received net proceeds of approximately $840,000, (after
expenses of the offering). The Bridge Notes are payable, together with interest
at the rate of 10% per annum, on the earlier of December 2, 1997 or the closing
of the Offering. See "Use of Proceeds and Plan of Operations." The Bridge
Warrants entitled the holders thereof to purchase one share of Common Stock
commencing December 2, 1997 but will be exchanged automatically on the closing
of the Offering for the Selling Securityholder Warrants, each of which will be
identical to the Class A Warrants included in the Units offered hereby. The
Selling Securityholder Securities have been registered for resale in the
Registration Statement of which this Prospectus forms a part, subject to the
contractual restriction that the Selling Securityholders have agreed not to
exercise, sell, transfer, hypothecate, assign or otherwise dispose of the
Selling Securityholder Warrants for a period of one year from the closing of the
Offering. See "Concurrent Offering."
Upon repayment of the Bridge Notes, the unamortized balance of the $500,000
debt discount attributable to the Bridge Warrants as well as other debt issuance
costs will be charged to the Company's operations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
14
<PAGE>
DILUTION
The following discussion and tables allocate no value to the Warrants
contained in the Units.
Dilution represents the difference between the initial public offering
price paid by the purchasers in the Offering and the net tangible book value per
share immediately after completion of the Offering. Net tangible book value per
share represents the amount of the Company's total assets minus the amount of
its intangible assets and liabilities, divided by the number of shares of Common
Stock outstanding. The pro forma adjustment to the historical net tangible book
value gives effect to the issuance in December 1996 of the Bridge Notes, net of
debt issue costs and debt discount, and the conversion on the closing of the
Offering of the Stockholder Debt into equity and the outstanding shares of
Series A Preferred Stock to Common Stock. At September 30, 1996, the Company had
a negative pro forma net tangible book value of $(126,000) or $(.17) per share
($(.34) per share if the Escrow Shares were excluded). See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Concurrent Offering," "Certain Transactions" and Notes A, F and I of Notes to
Financial Statements. After giving retroactive effect to the sale of 1,200,000
Units offered hereby, and the Company's receipt of the net proceeds therefrom
less underwriting discounts, commissions and other estimated offering expenses
(anticipated to aggregate $1,225,000), the net tangible book value of the
Company, as adjusted, at September 30, 1996 would have been $4,691,000 or $2.44
per share. This would result in an immediate dilution to the public investors of
$2.56 per share and the aggregate increase in the pro forma net tangible book
value to present stockholders would be $2.73 per share ($3.32 per share if the
Escrow Shares were excluded).
The following table illustrates the pro forma information with respect to
dilution to new investors on a per share basis:
Public offering price per share ........................ $5.00
Pro forma negative net tangible book
value per share before Offering ...................... $(.17)
Increase per share attributable to new investors ....... $2.73
-----
Net tangible book value per share after Offering ....... $2.56
-----
Dilution to new investors(1) ........................... $2.44
=====
- --------
(1) If the over-allotment option is exercised in full, the net tangible book
value after the Offering would be approximately $2.61 per share, resulting
in dilution to new investors in the Offering of $2.39 per share.
The following table summarizes the differences between existing
stockholders and new investors with respect to the number of shares of Common
Stock purchased from the Company, the total consideration paid to the Company
and the average price per share paid by existing stockholders and by new
investors:
<TABLE>
<CAPTION>
Total
Shares Purchased Consideration Paid
-------------------- ------------------- Average Price
Number Percent Amount(1) Percent Per Share
-------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C>
Existing Stockholders ................ 721,326(2) 37.5% $2,174,440 27.0% $2.72
New Investors ........................ 1,200,000 60.5% $6,000,000 73.0% $5.00
--------- ------ ---------- ------
Total ................................ 1,921,326(2) 100.0% $8,174,440 100.0%
========= ====== ========== ======
</TABLE>
- --------
(1) Prior to deduction of costs of issuance.
(2) Includes the 349,370 Escrow Shares. See "Principal Stockholders-- Escrowed
Shares and Options."
The foregoing table does not give effect to exercise of any outstanding
options or warrants. To the extent such options or warrants are exercised there
will be further dilution to new investors. See "Capitalization-Bridge
Financing," "Management-Stock Option Plan" and "Description of Securities."
15
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below for the period from July 20,
1994 (commencement of operations) through December 31, 1994, the year ended
December 31, 1995, the nine month periods ended September 30, 1995 and September
30, 1996 and the period from July 20, 1994 (commencement of operations ) through
September 30, 1996, respectively and the balance sheet data at September 30,
1996 have been derived from the Financial Statements of the Company. The data
for the nine month periods ended September 30, 1995 and September 30, 1996
include all adjustments consisting of only normal recurring adjustments that
management considers necessary to fairly present such data. The results for the
nine months ended September 30, 1996 are not necessarily indicative of the
results to be expected for the full year ending December 31, 1996. The Financial
Statements of the Company, together with the notes thereto and the report of
Richard A. Eisner & Company, LLP, independent auditors, are included elsewhere
in this Prospectus. The selected financial data set forth below should be read
in conjunction with the Financial Statements and Notes thereto and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
July 20, 1994 July 20, 1994
(Commencement Nine Months (Commencement
of Operations) Ended of Operations)
through Year Ended September 30, through
December 31, December 31, ------------------------- September 30,
1994 1995 1995 1996 1996
---------- ---------- --------- -------- ----------
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Research and development expenses . $ 78,000 $ 397,000 $ 227,000 $ -- $ 475,000
General and administrative expenses 159,000 466,000 418,000 808,000 1,433,000
Net loss .......................... (230,000) (876,000) (647,000) (850,000) (1,956,000)
Pro forma net loss per share(1) ... $ (2.31) $ (2.17)
Shares used in computing pro forma
net loss per share(1) ........... 371,956 371,956
</TABLE>
At September 30, 1996
---------------------------
Actual Pro Forma(2)
---------- ----------
Balance Sheet Data:
Working capital (deficit) ..................... $ (413,000) $ 845,000
Total assets .................................. 571,000 1,711,000
Total current liabilities ..................... 436,000 158,000
Deficit accumulated during development stage .. (1,956,000) (2,078,000)
Total stockholders' equity (capital deficiency) (701,000) 883,000
- --------
(1) The pro forma net loss per share computation gives retroactive effect to
the conversion on completion of the Offering of (i) $1,083,713 of
outstanding indebtedness at August 31, 1996, plus accrued interest thereon
(the "Stockholder Debt") into 263,921 shares of the Company's Common Stock
and (ii) the Series A Preferred Stock and accrued dividends thereon
aggregating $722,000 into 175,793 shares of Common Stock, excludes the
Escrow Shares and Escrow Options. See "Certain Transactions" and Notes A,
B(4) and I of Notes to Financial Statements.
(2) Gives pro forma effect to (i) the issuance of the Bridge Notes and the
Bridge Warrants subsequent to September 30, 1996; (ii) working capital
advances from stockholders aggregating $140,000 subsequent to September 30,
1996; and (iii) the conversion of the Stockholder Debt and the Series A
Preferred Stock into Common Stock upon completion of the Offering. See
"Capitalization-Bridge Financing," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Certain Transactions."
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto appearing elsewhere in this
Prospectus.
Results of Operations
The Company is in the development stage. Since its inception in July 1994,
the Company's efforts have been principally devoted to research, development and
design of products, marketing activities and raising capital. The Company has
generated only nominal revenues from the placement of test products and has
incurred substantial operating losses to date, which losses are continuing.
Since inception, the Company has sustained cumulative losses of
$(1,956,000). These losses have resulted primarily from expenditures for general
and administrative activities, including salaries, marketing and professional
fees which have aggregated $1,433,000 since inception. General and
administrative expenses increased from $418,000 during the nine months ended
September 30, 1995 to $808,000 during the nine months ended September 30, 1996,
an increase of 93%. This increase reflects (i) the Company's shift after
December 31, 1995 from research and development activities to the initiation of
sales and marketing efforts aimed at commercializing the IntelliFit System and
(ii) a $236,000 compensation charge relating to the issuance of options to
executive officers in August 1996. From inception through December 31, 1995, the
Company incurred aggregate research and development expenses of $475,000. All
development costs relating to the IntelliFit System incurred prior to December
31, 1995 were expensed. See Note B(1) of Notes to Financial Statements. The
Company did not have any expenditures for research and development during the
nine months ended September 30, 1996.
Liquidity and Capital Resources
The Company has funded its activities to date through loans from principal
stockholders and private placements of equity and debt securities. As of
September 30, 1996, the Company had a working capital deficit of $(413,000).
In December 1996, the Company completed the Bridge Financing which
consisted of $1,000,000 principal amount of Bridge Notes bearing interest at an
annual rate of 10% and warrants to purchase an aggregate of 500,000 shares of
Common Stock. See "Capitalization-Bridge Financing." The proceeds of the Bridge
Financing, which were approximately $840,000 (net of $100,000 in commissions and
a $30,000 expense allowance paid to the Underwriter which acted as placement
agent and other expenses of the private placement) have been utilized by the
Company for working capital purposes including general and administrative
expenses and expenses of the Offering. The Company intends to repay the
principal and accrued interest on the Bridge Notes with a portion of the
proceeds of the Offering. See "Use of Proceeds and Plan of Operations" and
"Certain Transactions." The Company will recognize a non-recurring charge of
$660,000 representing the aggregate debt discount and debt issuance costs
associated with the Bridge Financing at the time of repayment. See Note I of
Notes to Financial Statements.
From time to time, the Company's stockholders, including Steven R. Gumins,
Chief Executive Officer of the Company, Deborah E. Griffin, Chief Operating
Officer, and Jonathan W. Seybold, Chairman of the Board of the Company, have
funded the Company's working capital requirements. All amounts advanced prior to
August 31, 1996 were contributed to the capital of the Company. Between
September 1996 and December 3, 1996, working capital advances in the aggregate
principal amount of $170,000 were made to the Company. The Stockholder Advances
bear interest at the rate of 10% per annum and will be repaid from the proceeds
of the Offering. See "Use of Proceeds and Plan of Operations" and "Certain
Transactions."
During the 12-month period following the Offering, the Company is committed
to pay approximately $300,000 in compensation to its current executive officers.
See "Management Employment Agreements" and "Certain Transactions."
At December 31, 1995 and September 30, 1996, the Company had available net
operating loss carryforwards to reduce future taxable income of approximately
$456,000 and $710,000, respectively. The net operating loss carryforwards expire
in various amounts through 2011. The Company's ability to utilize its net
operating loss carryforwards will be subject to annual limitations pursuant to
Section 382 of the Internal Revenue Code if future changes in ownership occur,
including an annual limitation of not less than approximately $210,000 resulting
from the change in ownership arising from the Offering.
17
<PAGE>
Release of Escrowed Shares and Options
In connection with the Offering, the current shareholders of the Company
and holders of options are placing a portion of their shares and/or options in
escrow pending the Company's attainment of certain revenue or market price
goals. See "Principal Stockholders." The Commission has taken the position with
respect to the release of securities from escrow that in the event any of the
shares or options are released from escrow to directors, officers, employees or
consultants of the Company, the release will be treated, for financial reporting
purposes, as compensation expense to the Company. In the event the Company
attains any of the earnings or market price targets required for the release of
Escrow Shares and Options, the release of the Escrow Shares and Options to such
individuals will be deemed additional compensation expense to the Company.
Accordingly, the Company will, in the event of the release of the Escrow Shares
and Options recognize during the period in which the earnings or market price
targets are met, what could be a substantial one-time charge which would
substantially increase the Company's loss or reduce or eliminate earnings, if
any, at such time. Such charge to earnings will not be deductible by the Company
for income tax purposes. The amount of compensation expense recognized by the
Company will not affect the Company's total stockholders' equity. See Note F of
Notes to Financial Statements.
Plan of Operations
The report of the independent auditors on the Company's financial
statements as of December 31, 1995 contains an explanatory paragraph regarding
an uncertainty with respect to the ability of the Company to continue as a going
concern. The Company has generated only nominal revenues and has incurred an
accumulated deficit through September 30, 1996 of $(1,956,000). However, the
Company believes that upon the completion of the Offering and the receipt of the
proceeds therefrom, it will have the necessary liquidity and capital resources
to sustain planned operations for the 18 month period following the Offering.
During the 12-month period following completion of the Offering, the
Company intends to focus its efforts on marketing the Intellifit System to
certain target markets, including the military, commercial clubs, hospital
facilities, corporations, insurance companies and health maintenance
organizations. See "Business-Strategy." The Company expects to hire three or
four additional sales and marketing personnel during the next 12 months who will
pursue a variety of marketing techniques in order to gain access to potential
customers. See "Business-Marketing."
During the 12-month period following completion of the Offering, the
Company also intends to devote its resources to the development of enhancements
of the Intellifit System in order to enable the Company to target the
rehabilitation market. The company will also focus on the provision of technical
support for purchasers of its products and on the development of product
improvements and upgrades. See "Use of Proceeds and Plan of Operations."
In the event that the Company's internal estimates relating to its planned
expenditures prove materially inaccurate or the Company's marketing efforts do
not result in significant product sales, the Company may be required to
reallocate funds among its planned activities and curtail certain planned
expenditures. In any event, the Company is unable to predict whether revenues
from operations will be sufficient to fund the Company's working capital
requirements beyond 18 months. Therefore, the Company may be required to obtain
substantial additional financing through equity or debt financings,
collaborative arrangements or otherwise. There can be no assurance as to the
availability or terms of any required additional financing, when and if needed.
In the event that the Company fails to raise any funds it requires, it may be
necessary for the Company to significantly curtail its activities or cease
operations. See "Use of Proceeds and Plan of Operations".
18
<PAGE>
BUSINESS
General
The Company was formed in July 1994 and currently its sole product is the
IntelliFit System, a computerized system which generates personalized exercise
prescriptions and tracks and records fitness progress. The exercise
prescriptions are based on, among other things, an individual's weight, ability,
medical history, goals, fitness level and exercise preferences. The IntelliFit
System interacts with a user by applying algorithms to an individual's personal
profile and adjusting a user's exercise prescription based on progress,
frequency of workouts and other variables. The Company believes that this
interactive feature helps motivate users to continue exercising, and allows
users to reach their goals more quickly. The IntelliFit System is designed to
accommodate all levels of exercise experience and all age groups. The software
embodied in the IntelliFit System is based on training guidelines and circuit
training techniques recommended by the American College of Sports Medicine which
the Company believes provide superior results in less time than other training
methods.
The IntelliFit System operates from a freestanding kiosk which houses
off-the-shelf computer hardware purchased from major equipment manufacturers,
including a computer with a touch screen display, a modem used to communicate
with a central database, a motorized smart card reader, a scanner and a printer.
The IntelliFit System is accessed by a smart card, similar in size to a credit
card, which contains a microprocessor chip which is able to store information in
memory (the "IntelliCard").
The original computer source programs and related documentation and
computerized services and instructional material (collectively, the "EIS
System") on which the IntelliFit System is based was developed for Nautilus
Group Japan, Ltd. ("NGJ Ltd."), an American company operating in Japan and
currently the owner of all of the issued and outstanding shares of Series A
Preferred Stock of the Company. The Company acquired the rights to the EIS
System from NGJ Ltd. in August 1994 in exchange for the Series A Preferred Stock
and spent approximately 2 years modifying and expanding upon the EIS System in
order to create the IntelliFit System. NGJ Ltd. has advised the Company that the
EIS System is currently installed in nine facilities in Japan and has generated
over 7 million individualized exercise prescriptions. EIS System users in Japan
range in age and are divided almost equally among males and females. See
"Business-Relationship with NGJ Ltd."
During the first 18 months of the Company's existence, management focused
on research and development activities and on limited sales and marketing
activities. Beginning in the spring of 1996, the Company installed the
IntelliFit System in selected facilities in different markets, including
military, hospital, private and corporate fitness centers. The Company has
refined and improved the IntelliFit System based on its experience in the trial
markets. The Company has recently begun to focus on broader-based marketing
activities. The Company has generated only nominal revenues from product sales
as the Company has concentrated on evaluating acceptance of the IntelliFit
System in a variety of markets, varying sales and pricing approaches and
modifying installation, training and support services provided. There can be no
assurance that the Company will successfully commercialize its product, generate
any significant revenues or ever achieve profitable operations.
Strategy
The Company's strategy is to market and sell the IntelliFit System
initially in selected United States markets. The Company's first target markets
are military facilities, commercial clubs, hospital facilities, corporate
facilities, insurance companies and health maintenance organizations. The
Company believes that these markets have the greater user concentration and that
penetration of these markets could help establish the Company's credibility in
other markets. Subsequent target markets include universities, schools,
government facilities and resorts. The Company anticipates developing
enhancements to the IntelliFit System to enable the System to serve the
rehabilitation market. This will enable patients who exercise as part of their
rehabilitation program to use the System to follow their exercise program in a
local fitness center. In addition, the Company intends to explore other markets
for the IntelliFit software, including selling the software as an individually
packaged product for use on personal computers and providing the software to
Internet users.
The Company believes that the potential benefits to a fitness center of
installing the IntelliFit System are: (i) membership turnover will be reduced as
use of the IntelliFit System increases member interest by providing
goal-oriented personalized training at affordable prices and reduces the time
spent in the fitness center as a full workout using IntelliFit can be completed
in 30 minutes; (ii) since workouts based on circuit training techniques are
19
<PAGE>
shorter, overcrowding in the fitness center can be reduced; (iii) fitness
centers can use the continual information provided on member usage, interests,
history, performance and goals for marketing purposes; (iv) fitness centers can
track patterns of facility and equipment use and can incorporate such knowledge
into scheduling facility hours and determining staffing requirements; (v) the
fitness facility will be able to standardize the method by which members train
and thereby eliminate the uncertainties created by multiple instructors who use
differing techniques; (vi) fitness centers will be able to reduce the number of
trainers employed; and (vi) fitness centers will be better positioned to
integrate technologies incorporating synergistic products relating to health,
wellness and lifestyle. The Company also believes that insurance companies and
health maintenance organizations ("HMOs") can benefit from the IntelliFit
System. Insurance companies and HMOs are increasingly searching for ways to
reduce medical costs by helping their insureds lead healthier lifestyles. Some
insurance companies and HMOs have begun to offer financial incentives to
insureds who exercise regularly; however, there is a need to monitor compliance
by the insured with any programs offered. The IntelliFit System allows the
insurance companies and HMOs to monitor if, and how frequently, its insureds are
using a fitness center, the types of exercises being done and the progress made.
Weight loss clinics can similarly benefit from the ability to monitor their
clients' exercise routines.
The Company believes that there are many benefits to the users of the
IntelliFit System including, among other things, that it (i) motivates a user by
providing continual encouragement and information on a user's progress in
reaching his goals; (ii) provides interactive personalized training at
affordable prices; and (iii) enables a user to follow his personalized exercise
program in any fitness center that has the IntelliFit System.
Product
The IntelliFit System operates from a freestanding kiosk which houses
off-the-shelf hardware purchased from major equipment manufacturers. The
components include a computer with touch screen display, a modem used to
communicate with a central database, a motorized smart card reader, a scanner
and a printer. All user information is stored on the IntelliCard. The
IntelliCard can be used at any site which has an IntelliFit System. The software
embodied in the IntelliFit System is an expert system which takes numerous
variables for each individual, applies the variables to an equation and
determines the best workout program for that specific individual using the
exercise equipment at a particular facility. Each time an individual uses the
IntelliFit System, an individual's variables are updated and a new exercise
program is generated.
The IntelliFit software is written in C++ object-oriented programming
language which allows ease of customization and portability to new hardware
components and platforms.
The IntelliFit software is based on training guidelines and circuit
training techniques recommended by the American College of Sports Medicine.
Circuit training means that a user can perform a single set of approximately 8
to 12 repetitions of different exercises in approximately 30 minutes. This
method contrasts to the traditional multiple sets approach used by many
body-builders. Based on the Company's research, the Company believes that users
of the IntelliFit System will be able to attain their goals using circuit
training techniques and will be more inclined to exercise as 30 minutes of
exercise generally represents a reasonable commitment for many time-pressured
individuals.
The IntelliFit System utilizes an electronic medium, known as digital
insertion media, to display on each personalized workout sheet a specific
advertising, promotional message or announcement targeted to that particular
user. The top right quadrant of the workout sheet is currently dedicated to this
application which the Company believes will become an additional source of
revenue. The IntelliFit system also provides personalized exercise suggestions
and motivational messages on a user's workout sheet based on that specific
user's performance. The Company believes that these personalized suggestions and
messages serve as important deterrents to exercise termination.
The Company maintains a central database system consisting of a Sun Server
with two hard drives designed for expandability, a high speed modem, a high end
backup unit and a laser printer. Administrative workstations are connected to
the server and are used to perform digital entry for processing new members,
creating smart cards and generating download files. The system runs utilities to
maintain the databases, automatically back them up, generate reports and
transfer files to and from administrative workstations. The server can also
download files to the kiosks. Each kiosk is able to continue standard operation
even if there is no communication with the central computer system for up to two
weeks in view of the system's ability to receive and process delayed
communications and out of sequence information. Based on its current
configuration, the system can support one million members.
Fitness centers are not required to purchase new equipment or modify
existing equipment to use the IntelliFit System, as the System can be used with
any type of exercise equipment. This is unlike certain of the Company's
competitors' products which require fitness centers to use one brand of fitness
equipment or to retrofit existing
20
<PAGE>
equipment. The IntelliFit System can prescribe alternative equipment in order to
vary a user's workout or to work around injuries or machines that are being
serviced. As part of the Company's preinstallation procedures, the Company
obtains a list of the equipment configuration for the fitness center where the
IntelliFit System is to be installed. Based on this information, the IntelliFit
System prescribes exercise programs for users using the equipment in that
particular facility. In the event that a facility changes certain pieces of
equipment or in the event that certain pieces of equipment are being serviced,
the facility staff is trained to input such information into the IntelliFit
System and the System will automatically prescribe around such equipment.
The Company intends to lease the IntelliFit System to its customers for a
set monthly fee and to charge its customers an annual fee for each user which
may be paid by the facility or the user. IntelliFit forms, pencils, clipboards,
cleaning solutions and instruments will be provided to the fitness center with
each installation and additional supplies will be available to be purchased at
cost.
Use of the IntelliFit System. An individual who desires to use the
IntelliFit System first completes a new member form which asks the individual to
answer questions about, among other things, the individual's medical history,
activities in which the individual regularly participates, general fitness goals
and current fitness level. The individual fills in bubbles to answer certain of
the questions and hand writes answers to other questions. A member of the
fitness center staff then scans the form into the IntelliFit System and the
IntelliFit System prints out a personalized printed exercise program for the
user for that day. The Company suggests to each fitness center that a staff
member accompany the user the first time the user follows his personalized
exercise program in order to adjust equipment seat heights and to make any
individualized changes which appear to be necessary. An IntelliCard which
contains the user's personal information and the user's personalized exercise
program is issued to the user the next day. The next time the user goes to the
fitness center, the user is instructed to insert his IntelliCard into the kiosk
through a simple touch-screen interface on the computer screen in the kiosk. The
IntelliFit System generates the user's personalized printed workout sheet which
the user carries with him and marks off as he completes his exercises generally
by filling in bubbles. When the user finishes his workout, the user inserts the
completed workout sheet back into the kiosk. The information from the workout
sheet is scanned into the computer and the user's IntelliCard is updated. The
IntelliFit software then adjusts the user's next workout based on the exercises
the user has completed and the progress the user has made. All user information
is uploaded at the end of each day onto the Company's central database.
Types of Programs Offered. Currently the IntelliFit System provides over
300 goal-oriented programs for users to choose from. The following are some
examples:
Basic Fitness
Basic fitness is designed as an initial exercise program for individuals
who are beginning an exercise program.
General Fitness
General Fitness provides exercises for all the major muscle groups and
cardiovascular exercise to help strengthen the heart and lungs.
Active Fitness
Active Fitness prescribes exercise to increase endurance by strengthening
all the major muscle groups.
Aerobic Protection
Aerobic Protection is designed to strengthen the specific muscle groups
used in aerobic fitness exercises.
CardioFlex
CardioFlex is a comprehensive stretching and strengthening program used to
regain flexibility.
WalkPro
WalkPro strengthens the muscles of the upper and lower body helping to burn
calories while building strength and endurance.
Weight Management
Weight Management concentrates on weight loss goals with three phases and
difficulty levels of exercises.
21
<PAGE>
Corporate Fitness
Corporate Fitness is designed to counteract the physical and emotional
stress of working in an office.
Body Sculpting
Body Sculpting tones and strengthens the entire body as well as specific
areas.
Sports Conditioning
Sports conditioning programs provide specialized workouts designed to
concentrate on specific muscles used in sporting activities.
Each program is presented as a 20-session course. By providing varying work-out
course programs, the Company believes that users will continue to be interested
in and motivated to exercise. Each IntelliFit program accommodates all levels of
experience, from entry-level to seasoned fitness center veteran to professional
athlete. In addition, each IntelliFit program can be used by individuals in any
age group.
Benefits to IntelliFit Customer and User. The Company believes that the
potential benefits to a fitness center of installing the IntelliFit System are:
(i) membership turnover will be reduced as use of the IntelliFit System
increases member interest by providing goal-oriented personalized training at
affordable prices and reduces the time spent in the fitness center as a full
workout using IntelliFit can be completed in 30 minutes; (ii) since workouts
based on circuit training techniques are shorter, overcrowding in the fitness
center can be reduced; (iii) fitness centers can use the continual information
provided on member usage, interests, history, performance and goals for
marketing purposes; (iv) fitness centers can track patterns of facility and
equipment use and can incorporate such knowledge into scheduling facility hours
and determining staffing requirements; (v) the fitness facility will be able to
standardize the method by which members train and thereby eliminate the
uncertainties created by multiple instructors who use differing techniques; (vi)
fitness centers will be able to reduce the number of trainers employed; and (vi)
fitness centers will be better positioned to integrate technologies
incorporating synergistic products relating to health, wellness and lifestyle.
The Company also believes that insurance companies and HMOs can benefit from the
IntelliFit System. Insurance companies and HMOs are increasingly searching for
ways to reduce medical costs by helping their insureds lead healthier
lifestyles. Some insurance companies and HMOs have begun to offer financial
incentives to insureds who exercise regularly; however, there is a need to
monitor compliance by the insured with any programs offered. The IntelliFit
System allows the insurance companies and HMOs to monitor if, and how
frequently, its insureds are using a fitness center, the types of exercises
being done and the progress made. Weight loss clinics can similarly benefit from
the ability to monitor their clients' exercise routines.
The Company believes that there are many benefits to the users of the
IntelliFit System including, among other things, that it (i) motivates a user by
providing continual encouragement and information on a user's progress in
reaching his goals; (ii) provides interactive personalized training at
affordable prices; and (iii) enables a user to follow his personalized exercise
program in any fitness center that has the IntelliFit System.
Marketing
Currently, the Company has only five persos dedicated to sales and
marketing of the IntelliFit System and has very limited marketing experience. As
the Company's business grows, the Company will require additional sales and
marketing personnel. There is no assurance that the Company will be able to
recruit, train or retain qualified personnel to sell and market its product or
that it will develop a successful sales and marketing strategy. To date, the
Company has marketed the IntelliFit System primarily through demonstrations at
trade shows and advertisements in trade journals. The Company has allocated
$500,000 of the proceeds of the Offering for sales and marketing purposes. See
"Use of Proceeds and Plan of Operations." The Company expects to hire three to
four sales and marketing personnel during the next 12 months. Sales and
marketing efforts to be undertaken by the Company will include conducting
product demonstrations for potential customers, installations of kiosks on a
trial basis, attendance at conferences and meetings with military and hospital
personnel. There can be no assurance that any sales and marketing efforts
undertaken by the Company will be successful or will result in any significant
sales of its product.
The success of the Company's business is dependent upon acceptance of the
IntelliFit System by both the Company's potential customers and the actual users
of the System. The Company believes that there will be interest in its product
from military facilities, commercial clubs, hospital facilities, corporate
facilities, insurance
22
<PAGE>
companies and health maintenance organizations. However, there can be no
assurance that acceptance by any of the Company's potential customers will
occur. In addition, even if the IntelliFit System is installed in a fitness
center, ultimate success for the Company depends on whether individuals actually
use the System on a regular basis. The Company does not market its product
directly to these users. Instead, the Company trains fitness center staff to use
the IntelliFit System, provides each fitness center with brochures on the
IntelliFit System to distribute to users and requires fitness center staff to
introduce the IntelliFit System to its new members and all renewing members. The
Company has limited ability to monitor the manner and frequency with which
fitness center staff introduce the IntelliFit System to its new members or
renewing members or stimulate current member's interest in using the IntelliFit
System. In addition, a user must use the IntelliCard in order to access the
IntelliFit System. Although the Company believes that acceptance of smart cards
is increasing, there can be no assurance that such acceptance will occur in the
near future, if at all. A number of companies that have developed computer-based
fitness systems which prescribe personalized exercise programs have either had
limited success or have failed.
To date, the Company has installed kiosks in only six fitness centers on a
test basis. Three of the kiosks have been installed on one military base, three
have been installed in one hospital fitness center, one kiosk has been installed
in a private fitness center and one kiosk has been installed in a corporate
fitness center. Two kiosks are currently used for demonstrations at trade shows.
To date, the results of such tests have indicated satisfaction with the product
and a number of sites have reported enthusiastic responses. However, there can
be no assurance that the IntelliFit System will continue to perform as
anticipated or that the tests sites will result in significant purchase
contracts. In addition, the software embodied in the IntelliFit System may
contain errors which only become apparent subsequent to widespread commercial
use. The IntelliFit System may require improvements and refinements.
Difficulties in improving and refining the IntelliFit System could delay further
introductions and installations of the System and could cause the Company to
incur additional costs. This would have a material adverse effect on the
Company.
Relationship with Nautilus Group Japan, Ltd.
In August 1994, pursuant to an Assignment Agreement (the "Assignment
Agreement"), NGJ Ltd. assigned the EIS System along with registration for the
trademark "EIS Expert Instructor System" (the "Trademark") to the Company as a
contribution to capital in consideration for the issuance to NGJ Ltd. of 50
shares of the Company's Series A Preferred Stock, $.01 par value (the "Series A
Preferred Stock"). In addition, in August 1994 the Company issued 550 shares of
Series A Preferred Stock to NGJ for $550,000 in cash. Upon the closing of the
Offering, NGJ Ltd. will convert its shares of Series A Preferred Stock into
175,792 shares of Common Stock. See "Principal Stockholders." The assignment to
the Company is subject to a Japanese company's right to use the EIS System in
Sumitomo Nautilus Clubs in Japan pursuant to an exclusive franchise agreement
(the "NGJ Franchise Agreement") granted to such company by NGJ Ltd. Pursuant to
the Assignment Agreement, the Company granted NGJ Ltd. a royalty-free
non-exclusive license with respect to any and all improved, updated and enhanced
EIS Systems which may be designed, developed and implemented by the Company or
any of the Company's agents, employees and consultants (including, without
limitation, the right to sublicense such use) exclusively in Sumitomo Nautilus
Clubs in Japan pursuant to the NGJ Franchise Agreement. In addition, the Company
granted NGJ Ltd. a non-exclusive license with respect to the EIS Systems and the
Trademark and any and all improved, updated and enhanced EIS Systems (including
the IntelliFit System) ("New Products") which may be designed, developed and
implemented by the Company or any of the Company's agents, employees and
consultants (including, without limitation, the right to sublicense such use)
exclusively in Japan, such license to be effective upon (i) termination of the
NGJ Franchise Agreement, provided the NGJ Franchise Agreement is not replaced
with another license or franchise agreement between NGJ Ltd. and the Japanese
company or (ii) the date on which NGJ Ltd. reasonably concludes, based on an
examination of its quarterly financial results, that its annual revenue from the
NGJ Franchise Agreement has fallen below $1,000,000 (the "Termination
Conditions").
In June 1995, the Company entered into an Exclusive Distribution License
Agreement with NGJ Ltd. pursuant to which the Company granted NGJ Ltd. the
exclusive right and license to market, use and grant sub licenses to others to
distribute all fitness-related hardware and software products owned and
developed by the Company during the term of the Agreement in Japan. The
Agreement is terminable by either party on notice for cause or without cause, on
notice delivered not less than 90 days in advance of and effective on the fifth,
tenth, fifteenth, twentieth, or any subsequent five year anniversary of the date
the product is in a form suitable for sale in Japan (the "Suitability Date"). In
the event that the Company terminates the Agreement without cause, and within
120 days thereafter proposes to enter into an agreement with a third party to
distribute the products in Japan, NGJ Ltd. must be given the right to distribute
the products in Japan on the same terms as are contained in the agreement with
the third party. The Agreement also contains a provision requiring NGJ Ltd. to
use reasonable commercial efforts to exploit the
23
<PAGE>
products in Japan. As the sole remedy for NGJ Ltd.'s failure to exploit the
products, the Company may terminate the Agreement on 60 days notice at any time
after the third anniversary of the Suitability Date.
In November 1996, the Company and NGJ Ltd. entered into a letter agreement
pursuant to which the parties agreed that (i) in the event that neither of the
Termination Conditions have been met, royalties payable by NGJ Ltd. to the
Company on distributions of the EIS System and New Products by NGJ Ltd. outside
of Sumitomo Nautilus Clubs in Japan will be determined by the parties in the
future, and (ii) in the event that either of the Termination Conditions have
been met, no royalties will be payable by NGJ Ltd. to the Company on the first
$2,000,000 of revenue derived from distributions of the EIS System and New
Products by NGJ Ltd. outside of Sumitomo Nautilus Clubs in Japan and all
royalties in excess of such amount will be determined by the parties in the
future.
Service
The Company currently employs a technical support staff of four persons.
The technical support staff's responsibilities include being present on-site
when the IntelliFit System is delivered to a facility, unpacking and testing the
System and training the facility staff to use the System and to correct problems
with the System. In addition, technical support staff and engineers who are
qualified to answer more complex technical problems are generally available by
telephone during business hours to respond to questions. In the event that a
fitness center has difficulties with its computer hardware, the Company
contracts with local computer service centers for maintenance of the hardware.
Manufacturing and Development
The IntelliFit System operates from a freestanding kiosk which houses
off-the-shelf computer hardware purchased from major equipment manufacturers.
The Company does not intend to manufacture the kiosks or any of the hardware
components of the IntelliFit System. The kiosks are off-the-shelf products with
certain modifications and are currently manufactured for the Company by one
manufacturer. To date, kiosks have been manufactured on an as-needed basis;
however, the Company expects that in the future, kiosks will be manufactured in
increments of ten. The manufacturer of the kiosks also installs all of the
hardware in the kiosk and ships the fully-installed kiosk to the Company's
customers. Although all kiosks delivered have met Company specifications, there
can be no assurance that future deliveries of kiosks will be completed on a
timely basis. Although the Company believes that additional alternative sources
are available, failure by the manufacturer to supply the Company with high
quality finished products on commercially reasonable terms, or at all, could
have a material adverse effect on the Company.
The Company purchases its hardware from several suppliers. Although the
Company does not maintain formal agreements with any of its suppliers of
hardware, the Company believes that its current supply arrangements will satisfy
the Company's present and anticipated production requirements, and that the
Company has suitable alternative supply sources in the event that its current
arrangements are terminated or that current suppliers are otherwise unable to
fulfill its needs. However, there can be no assurance that such alternative
suppliers will be available. The failure or delay of other suppliers in
supplying product to the Company could result in delays in marketing or
operation of the IntelliFit System, which would have a material adverse effect
on the Company. In addition, a change in certain pieces of hardware could
require revisions to the software which could have a material adverse effect on
the Company.
The software embodied in the IntelliFit System was developed for the
Company by TransPac and a number of other third party software developers. In
August 1994, the Company entered into a Retainer Agreement with TransPac
pursuant to which TransPac was retained in order to assist the Company in
developing the specification for an update to the EIS System. For TransPac's
work under the Retainer Agreement, the Company paid TransPac a fee of $120,000.
In addition, the Company granted TransPac an option to acquire 10% of the Common
Stock of the Company at an exercise price per share equal to the price paid by
the initial purchasers of the Company's Common Stock. TransPac exercised this
option in February 1996. The Retainer Agreement contains a provision requiring
TransPac to provide future development services to the Company upon the
Company's request on designated, scheduled projects through December 31, 1998.
The first 500 hours of services in a calendar year will be compensated at a rate
of $125 per hour and the second 500 hours of services in a calendar year (and
any additional time) will be compensated at a rate of $150 per hour. Pursuant to
the Retainer Agreement, TransPac shall be entitled to designate one member to
the Company's Board of Directors until December 31, 1998. TransPac's current
designee to the Board of Directors is Kenneth W. Krugler, the President of
TransPac. The Company does not have any written contracts with any other
software developers. Currently, the Company has limited capability
24
<PAGE>
internally to perform upgrades or modifications to the software and there can be
no assurance that any required upgrades or modifications to the software can be
successfully made. This could have a material adverse effect on the Company. See
"Management-Officers and Directors."
Competition
The Company competes with companies that have developed computer-based
fitness systems which prescribe personalized exercise programs. The Company will
attempt to compete on the basis of cost, features offered, ease of use, time
spent at the kiosk and service; however, there is no assurance that the Company
will be able to compete with its competitors. Certain of the Company's
competitor's products require fitness centers to use one brand of fitness
equipment or to retrofit existing equipment. The Company believes that it has a
competitive advantage in this respect as fitness centers do not need to make any
additional expenditures for equipment or parts in order to use the IntelliFit
System. In addition, certain of the Company's competitor's have developed
products that are not interactive. The IntelliFit System interacts with a user
through artificial intelligence and adjusts a user's exercise prescription based
on progress, frequency of workouts and other variables. The Company believes
that this interactive feature helps motivate users to continue exercising,
reduces injuries and allows users to reach their goals more quickly. The
IntelliFit System is simple to use as a user merely inserts his IntelliCard into
the kiosk, receives an exercise program card, marks off the exercises completed
on the card generally by filling in bubbles and feeds the completed card back
into the kiosk. Certain of the Company's competitor's products require users to
type information directly onto the computer in the kiosk. This is time consuming
for the user and can create lines of users waiting to use the kiosk. The
IntelliFit System has been designed so that a user's average length of time
spent at the kiosk is under one minute. Finally, the Company intends to
concentrate on technical support in order to provide the fitness centers with
uninterrupted use of the IntelliFit System.
Certain of the Company's competitors have substantially greater financial,
marketing, technical, distribution and other resources and greater name
recognition than the Company. In addition, certain competitors have a
relationship with companies that manufacture exercise equipment. The Company may
also face competition from new companies that develop similar products to the
IntelliFit System. In addition, certain competitors have a relationship with
companies that manufacture exercise equipment. There can be no assurance that
enhancements to or future generations of competitive products will not be
developed which offer superior prices more attractive features, easier use
and/or better service than the Company's products.
Insurance
The provision of personalized exercise programs may subject the Company to
liability to its customers and/or the ultimate users of the IntelliFit System.
The Company's $1,000,000 insurance policy currently excludes coverage for bodily
injury. Although the Company intends to seek appropriate additional insurance,
there can be no assurance that any insurance obtained by the Company will be
sufficient to cover any or all claims against the Company which may arise. If
such insurance is insufficient, this could have a material adverse effect on the
Company.
Employees
The Company currently has 11 full-time employees, including two in
management and administration, five in sales and marketing and four in product
development/technical support. The Company also utilizes the services of five
independent contractors. The Company is highly dependent on the principal
members of its management including Steven R. Gumins, the Chief Executive
Officer of the Company and Deborah E. Griffin, the Chief Operating Officer of
the Company. The Company has employment agreements with each of Mr. Gumins and
Ms. Griffin and has obtained a $2,000,000 key person life insurance policy
covering Mr. Gumins' life. See "Management-Employment Agreements." The Company
is the sole beneficiary of such life insurance policy. The Company will not be
able to obtain key person life insurance on Deborah Griffin's life in view of
health problems affecting Ms. Griffin. The future success of the Company depends
in large part on its ability to attract and retain highly qualified personnel.
Competition for such personnel is intense and there can be no assurance that the
Company will be able to hire sufficient qualified personnel on a timely basis or
can retain such personnel in the future. None of the Company's employees is
represented by a labor union. The Company has not experienced any work stoppages
and considers its relations with its employees to be good.
25
<PAGE>
Facilities
The Company's corporate headquarters are located at 17575 Pacific Coast
Highway, Pacific Palisades, California 90272 where the Company occupies
approximately 2,000 square feet of space under a lease which expires August 18,
1997. The lease contains an option, exercisable by the Company, to renew for
continual additional one year terms. The lease currently provides for monthly
rental payments of $2,675. The monthly rental payment for each additional one
year term can be increased by no more than 7% per year. The Company believes
that in the event it does not renew this lease it can enter into a new lease for
equivalent space on commercially reasonable terms. The Company believes that its
existing facility is well maintained, in good operating condition and adequate
to meet its current requirements.
Legal Proceedings
The Company is not involved in any material legal proceedings.
26
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth the names, ages and positions of the
executive officers and directors of the Company.
Name Age Position
---- --- --------
Jonathan W. Seybold(1)(2) ............ 53 Chairman of the Board of Directors
Gregory L. Zink ...................... 40 President, Chief Financial Officer
and Director
Steven R. Gumins...................... 45 Chief Executive Officer, Vice
President-- Sales and
Director
Deborah E. Griffin(2)................. 44 Chief Operating Officer, Secretary
and Director
William Blase(1) ..................... 45 Director
Kenneth W. Krugler ................... 35 Director
M. Caroline Martin(2) ................ 56 Director
Allan Dalfen(1) ...................... 53 Director
- --------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
JONATHAN W. SEYBOLD has served as a director of the Company since its
inception in July, 1994. Mr. Seybold has served as Chairman of the Board since
July, 1994. Mr. Seybold also founded Seybold Seminars, Inc. ("Seybold
Seminars"), a company which conducts large scale, technology-based trade shows
and conferences and Seybold Publications ("Seybold Publications"), a company
which publishes reports on publishing systems, desktop publishing and digital
data applications. Mr. Seybold served as President of Seybold Seminars and
Seybold Publications from 1981 to 1993.
GREGORY L. ZINK has served as the Company's President and Chief Financial
Officer since July 1994 and a director of the Company since July 1994. Mr. Zink
is not involved in the day to day management of the Company and devotes only a
small portion of his business time to the Company. The Company expects to hire a
new Chief Financial Officer during the three months following the Offering. Mr.
Zink has served as Chief Operating Officer and Chief Financial Officer of
Nautilus Group Japan Ltd. since April 1988. Mr. Zink has also been Vice
President of Clark Management Co. Inc., an investment advisory company, since
January 1989. Mr. Zink holds an M.B.A. from the Wharton Business School.
STEVEN R. GUMINS has been the Company's Chief Executive Officer and Vice
President Sales since August 1994 and a director of the Company since August
1994. From August 1984 to January 1988 Mr. Gumins was the President of Computers
for Education, a provider of publishing materials to schools. From October 1992
to October 1993, Mr. Gumins was a Portfolio Analyst of Guild Investment
Management, Inc., an investment advisory firm. From October 1993 to August 1994,
Mr. Gumins was a Vice President of Portfolio Advisory Services, Inc., an
investment advisory firm. Mr. Gumins has a B.A. from the University of Buffalo
and participated in a United Nations program at the University of Chile in
Santiago, Chile.
DEBORAH E. GRIFFIN has served as the Company's Chief Operating Officer and
a director since August 1994. Prior to joining the Company, from 1982 to 1990,
Ms. Griffin was the Vice President Operations of Seybold Seminars. From November
1990 to July 1994, Ms. Griffin was the Vice President, Operations at Ziff-Davis
Exposition and Conference Company, Inc., a computer publishing company.
WILLIAM BLASE has been a director of the Company since August 1995. Since
1985, Dr. Blase has served a director of California Eye Care, an ophthalmology
practice. Since November 1992, Dr. Blase has been a director of Valley Health
Systems California District Hospital. Dr. Blase has an M.D. from the University
of Virginia School of Medicine and a M.S. from Oxford University in England.
KENNETH W. KRUGLER has served as a director of the Company since July 1994.
Mr. Krugler has served as President of TransPac Software Inc. since founding it
in January 1987. From 1983 to 1987, Mr. Krugler was a software architect at
Apple Computer, Inc. Mr. Krugler has a B.S. in Computer Science and Engineering
from the Massachusetts Institute of Technology.
27
<PAGE>
M. CAROLINE MARTIN has served as a director of the Company since December
1996. Since January 1986, Ms. Martin has served as Executive Vice President of
Riverside Health System, a multi-facility integrated healthcare system. She is
currently a member of the board of directors of Signet Bank.
ALLAN DALFEN has served as a director of the Company since December 1996.
Mr. Dalfen currently serves as President of Kent Spiegel Direct Inc., the
sporting goods and fitness division of Kent & Spiegel. Since January 1995, Mr.
Dalfen has also served as President of Dalfen Corporation, an investment
corporation. From October 1992 to December 1994, Mr. Dalfen served as President
and Chief Executive Officer of Vestro Foods, Inc. and from 1979 to 1992, Mr.
Dalfen served as President and Chief Executive Officer of Weider Health and
Fitness. Mr. Dalfen is currently a director of Vestro Foods, Inc.
Directors serve until the next annual meeting of shareholders or until
their successors are elected and qualified. Officers serve at the discretion of
the Board of Directors, subject to rights, if any, under contracts of
employment. See "Management -- Employment Agreements."
Board Committees and Designated Directors
The Board of Directors has a Compensation Committee which makes
recommendations to the Board concerning salaries and incentive compensation for
officers and employees of the Company and may administer the Company's stock
option plan. See "Management -- Stock Option Plan." The Board of Directors also
has an Audit Committee which reviews the results and scope of the audit and
other accounting related matters.
Pursuant to the Retainer Agreement entered into by the Company and
TransPac, TransPac shall be entitled to designate one member to the Company's
Board of Directors until December 31, 1998. TransPac's current designee to the
Board of Directors is Kenneth W. Krugler, the President of TransPac. See
"Business-Manufacturing and Development."
The Company has agreed, if requested by the Underwriter, to nominate a
designee of the Underwriter to the Company's Board of Directors for a period of
five years from the date of this Prospectus. The Underwriter has not designated
a nominee as of the date of this Prospectus. See "Underwriting."
Director Compensation
Directors are entitled to receive options pursuant to the Company's 1996
Stock Option Plan. See "Management-Stock Option Plan." On effectiveness of the
Offering, the Company will grant five-year options to purchase 1,000 shares of
Common Stock to each of Jonathan W. Seybold, Gregory L. Zink, Dr. William Blase,
M. Caroline Martin, Allan Dalfen and Kenneth W. Krugler. On such date, the
Company also intends to enter into a consulting agreement with Mr. Seybold
pursuant to which he will receive five-year options to purchase 5,000 shares of
Common Stock. All of such options will be exercisable at $5.00 per share
commencing one year from the date of grant.
Executive Compensation
The following Summary Compensation Table sets forth the compensation earned
by Steven Gumins, the Company's Chief Executive Officer and one other executive
officer of the Company whose total annual salary and bonus exceeded $100,000 for
the fiscal year ended December 31, 1996.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-term
Annual Compensation Compensation
--------------------------- ----------------------
Name and Securities Underlying
Principal Position Year Salary Bonus Options
------------- ---- ----- ----- ---------
<S> <C> <C> <C> <C>
Steven R. Gumins, Chief Eecutive Officer 1996 $133,436 -- 138,110
and Vice President-Sales.................. 1995 $100,000 $6,000
1994 $ 34,722 --
Deborah E. Griffin, Chief Operating Officer.. 1996 $133,436 -- 140,564
1995 $100,000 $6,000
1994 $ 34,722 --
</TABLE>
28
<PAGE>
Options Granted in Last Fiscal Year
The following table sets forth certain information concerning stock options
granted to the named executive officers during the fiscal year ended December
31, 1996:
<TABLE>
<CAPTION>
Number of
Shares of Percent of Total
Common Stock Options Granted Exercise or
Underlying to Employees Base Price Expiration
Name Options During 1996 Per Share (1) Date
- ----- ----------- --------------- ------------ ----
<S> <C> <C> <C> <C>
Steven R. Gumins..................... 38,110(1) 49.6% $ .50 8/06
100,000(2) $5.00 10/06
Deborah E. Griffin................... 40,564(1) 50.4% $ .50 8/06
100,000(2) $5.00 10/06
- ---------
(1) Such options are currently exercisable.
(2) Such options vest in four equal annual installments commencing October 16,
1997.
</TABLE>
Employment Agreements
On December 1, 1996, the Company entered into three-year employment
agreements with each of Mr. Gumins and Ms. Griffin. The agreements provide for a
base annual salary of $150,000 and bonuses at the discretion of the Board to be
based on the achievement of performance objectives, with a bonus of $25,000
during the first year of the agreement if the Company attains break-even during
any fiscal quarter of 1997. The agreements provide for severance equal to four
months' base salary in the event of termination other than for "cause" (as
defined), except that in the event of death or disability, severance shall be
equal to six months' base salary. All of the agreements also contain a five-year
post-termination confidentiality provision and a six-month post terminatio
non-competition provision.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Company's Board is comprised of Jonathan
W. Seybold, M. Caroline Martin and Allan Dalfen. None of these individuals other
than Mr. Seybold was at any time during the fiscal year ended December 31, 1995
or at any other time, an officer or employee of the Company. No member of the
Compensation Committee of the Company serves as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving as a member of the Company's Board of Directors or Compensation
Committee.
Stock Option Plan
In October 1996, the Board of Directors adopted and the Company's
stockholders approved, the 1996 Stock Option Plan (the Plan") covering 250,000
shares of the Company's Common Stock pursuant to which employees, officers and
directors of, and consultants or advisers to, the Company and any subsidiary
corporations are eligible to receive incentive stock options ("incentive
options") within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code") and/or options that do not qualify as incentive
options ("non-qualified options"). The Plan, which expires in October 2006, will
be administered by the Board of Directors or a committee of the Board of
Directors; provided, however, that with respect to "officers" and "directors,"
as such terms are defined for the purposes of Rule 16b-3 ("Rule 16b-3")
promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"), such
committee shall consist of "disinterested" directors as defined in Rule 16b-3,
but only if at least two directors meet the criteria of "disinterested"
directors as defined in Rule 16b-3. The purposes of the Plan are to ensure the
retention of existing and future executive personnel, key employees, directors,
consultants and advisors who are expected to contribute to the Company's future
growth and success and to provide additional incentive by permitting such
individuals to participate in the ownership of the Company, and the criteria to
be utilized by the Board of Directors or the committee in granting options
pursuant to the Plan will be consistent with these purposes. The Plan provides
for automatic grants of options to certain directors in the manner set forth
below.
Options granted under the Plan may be either incentive options or
non-qualified options. Incentive options granted under the Plan are exercisable
for a period of up to 10 years from the date of grant at an exercise price which
is not less than the fair market value of the Common Stock on the date of the
grant, except that the term of an incentive option granted under the Plan to a
stockholder owning more than 10% of the outstanding voting power may not exceed
five years and its exercise price may not be less than 110% of the fair market
value of the Common Stock on the date of the grant. To the extent that the
aggregate fair market value, as of the date of grant, of the shares for which
incentive options become exercisable for the first time by an optionee during
the calendar year exceeds $100,000, the portion of such option which is in
excess of the $100,000 limitation will be treated as a non-qualified option.
Options granted under the Plan to officers, directors or employees of the
Company may be exercised only
29
<PAGE>
while the optionee is employed or retained by the Company or within 90 days of
the date of termination of the employment relationship or directorship. However,
options which are exercisable at the time of termination by reason of death or
permanent disability of the optionee may be exercised within 12 months of the
date of termination of the employment relationship or directorship. Upon the
exercise of an option, payment may be made by cash or by any other means that
the Board of Directors or the committee determines. No option may be granted
under the Plan after October 2006.
Options may be granted only to such employees, officers and directors of,
and consultants and advisors to, the Company or any subsidiary of the Company as
the Board of Directors or the committee shall select from time to time in its
sole discretion, provided that only employees of the Company or a subsidiary of
the Company shall be eligible to receive incentive options. An optionee may be
granted more than one option under the Plan. The Board of Directors or the
committee will, in its discretion, determine (subject to the terms of the Plan)
who will be granted options, the time or times at which options shall be
granted, and the number of shares subject to each option, whether the options
are incentive options or non-qualified options, and the manner in which options
may be exercised. In making such determination, consideration may be given to
the value of the services rendered by the respective individuals, their present
and potential contributions to the success of the Company and its subsidiaries
and such other factors deemed relevant in accomplishing the purpose of the Plan.
To date, options to purchase an aggregate of 200,000 shares at an exercise
price of $5.00 per share have been granted under the Plan, 100,000 of which were
issued to each of Deborah E. Griffin and Steven R. Gumins. These options are
exercisable in four equal annual installments commencing one year from the date
of grant. On the date of this Prospectus, options to purchase an aggregate of
11,000 shares at an exercise price of $5.00 per share will be granted to certain
directors of the Company. See "Director Compensation."
Limitation of Liability and Indemnification Matters
The Company's Certificate of Incorporation eliminates in certain
circumstances the liability of directors of the Company for monetary damages for
breach of their fiduciary duty as directors. This provision does not eliminate
the liability of a director (i) for breach of the director's duty of loyalty to
the Company or its stockholders, (ii) for acts or omissions by the director not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) for willful or negligent declaration of an unlawful dividend, stock
purchase or redemption, or (iv) for transactions from which the director derived
an improper personal benefit. Such limitation of liability does not affect the
availability of equitable remedies such as injunctive relief or rescission.
The Company believes that it is the position of the Securities and Exchange
Commission that insofar as the foregoing provision may be invoked to disclaim
liability for damages arising under the Securities Act, the provision is against
public policy as expressed in the Securities Act and is therefore unenforceable.
Such limitation of liability also does not affect the availability of equitable
remedies such as injunctive relief or recision.
The Company intends to enter into indemnification agreements
("Indemnification Agreement(s)") with each of its directors and officers after
the Offering. Each such Indemnification Agreement will provide that the Company
will indemnify the indemnitee against expenses, including reasonable attorneys'
fees, judgments, penalties, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with any civil or criminal action or
administrative proceeding arising out of his performance of his duties as a
director or officer, other than an action instituted by the director or officer.
Such indemnification will be available if the indemnitee acted in good faith and
in a matter he reasonably believed to be in or not opposed to the best interests
of the Company, and, with respect to any criminal action, had no reasonable
cause to believe his conduct was unlawful. The Indemnification Agreements will
also require that the Company indemnify the director or other party thereto in
all cases to the fullest extent permitted by applicable law. Each
Indemnification Agreement will permit the director or officer that is party
thereto to bring suit to seek recovery or amounts due under the Indemnification
Agreement and to recover the expenses of such a suit if he is successful.
The Company's By-laws provide that the Company shall indemnify its
directors, officers, employees or agents to the full extent permitted by the
Delaware General Corporation Law, and the Company shall have the right to
purchase and maintain insurance on behalf of any such person whether or not the
Company would have the power to indemnify such person against the liability. The
Company has not currently purchased any such insurance policy on behalf on any
of its directors, officers, employees or agents.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding which may result in a claim for indemnification.
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<PAGE>
CERTAIN TRANSACTIONS
In October 1995, the Company borrowed an aggregate of $241,666 from NGJ
Ltd., Deborah E. Griffin, Steven R. Gumins, Jonathan W. Seybold and TransPac. In
March 1996, the Company borrowed an aggregate of $289,579.60 from NGJ Ltd. and
Jonathan W. Seybold. In June 1996, the Company borrowed an aggregate of
$112,810.75 from NGJ Ltd., Jonathan W. Seybold and William Blase. In August
1996, the Company borrowed an aggregate of $129,197.14 from NGJ Ltd., Deborah E.
Griffin, Jonathan W. Seybold and William Blase.
In June 1995, the Company borrowed $250,000 from NGJ Ltd. pursuant to a one
year promissory note at an interest rate of 10% per annum. In September 1996,
NGJ Ltd. extended the repayment date of the promissory note to June 1997.
Repayment of a portion of the loan was secured by 2,988 shares of Common Stock
held by each of Deborah E. Griffin and Steven R. Gumins. NGJ Ltd. agreed to
eliminate the security for repayment of the note in September 1996.
All of the foregoing indebtedness will be converted upon completion of the
Offering into an aggregate of 263,921 shares, representing a conversion rate of
$4.11 per share.
In August 1996, the Company issued ten-year options to purchase 40,564
shares of Common Stock to Ms. Griffin and options to purchase 38,110 shares of
Common Stock to Mr. Gumins, each at an exercise price of $.50 per share. Such
options are currently exercisable. See "Management Employment Agreements" and
"Principal Stockholders -- Escrowed Shares and Options."
In addition, in October 1996, the Company issued options to purchase
100,000 shares at an exercise price of $5.00 per share to each of Deborah E.
Griffin and Steven R. Gumins under the 1996 Stock Option Plan. Such options are
exercisable in four equal annual installments commencing one year from the date
of grant. See "Management-Stock Option Plan."
From September to December 3, 1996, the Company borrowed an aggregate of
$17,316, $10,221, $47,490, $4,946 and $90,044 from Deborah E. Griffin, Steven R.
Gumins, Jonathan W. Seybold, William Blase and NGJ Ltd., respectively, pursuant
to promissory notes bearing interest at the rate of 10% per annum. Such amount
will be repaid together with accrued interest from the proceeds of the Offering.
See "Use of Proceeds and Plan of Operations."
During the year ended December 31, 1995 and the nine months ended September
30, 1996, the Company paid approximately $10,000 and $79,000, respectively, to
TransPac for services under a Retainer Agreement. Kenneth W. Krugler, a director
of the Company, is the President of TransPac. At September 30, 1996, the Company
had an outstanding payable to Transpac of $61,437.
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. The Company has adopted a policy that all future
transactions, including loans, between the Company and its officers, directors,
principal stockholders and their affiliates will be approved by a majority of
the Board of Directors, including a majority of the independent and
disinterested outside directors on the Board of Directors, and will continue to
be on terms no less favorable to the Company than could be obtained from
unaffiliated third parties.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the ownership
of Common Stock by (i) each person known by the Company to own beneficially more
than 5% of each class of outstanding Common Stock, (ii) each director of the
Company, (iii) each executive officer of the Company named in the Summary
Compensation Table, and (iv) all executive officers and directors of the Company
as a group, (a) prior to the Offering giving pro forma effect to the conversion
of the Stockholder Debt and the Series A Preferred Stock into Common Stock upon
the completion of the Offering and (b) as adjusted to give effect to the sale of
the 1,200,000 Units offered hereby:
Percent of Shares
Beneficially Owned
Shares --------------------
Name and Address Beneficially Before After
of Beneficial Owner Owned(1) Offering Offering
------------------- -------- ------- -------
Nautilus Group Japan, Ltd.(2) ......... 366,514 50.8% 19.1%
Clark Trust u/t/d 6/30/69 (3) ......... 63,456 8.8 3.3
Seybold Family Trust (4) .............. 141,464 19.6 7.4
Jonathan W. Seybold (5) ............... 141,464 19.6 7.4
Gregory L. Zink (6) ................... 379,908 52.7 19.4
Steven R. Gumins (7) .................. 47,078 6.2 2.4
Deborah E. Griffin (8) ................ 54,182 7.1 2.8
William Blase (9) ..................... 14,278 2.0 *
Kenneth W. Krugler (10) ............... 21,108 * *
M. Caroline Martin (11) ............... -- * *
Allan Dalfen (12) ..................... -- * *
All executive officers and directors
as a group (eight persons)........... 658,018 82.3 32.9
- --------
* Less than 1%.
(1) Includes such individuals' Escrow Shares. See "Escrowed Shares and
Options" below. In computing the number of shares beneficially owned
by a person and the percentage ownership of a person, shares of Common
Stock of the Company, subject to options held by that person that are
currently exercisable or exercisable within 60 days are deemed
outstanding. Such shares, however, are not deemed outstanding for
purposes of computing the percentage ownership of each other person.
Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table
have sole voting and investment power with respect to all shares of
Common Stock.
(2) The address of such company is c/o Clark Management Co. Inc., P.O. Box
3090, Boynton Beach, Florida 33424. Gregory L. Zink is the Chief
Operating Officer of NGJ, Ltd.
(3) The address of such trust is c/o Clark Management Co. Inc., P.O. Box
3090, Boynton Beach, Florida 33424. Linda S. Potter and Stephen E.
Szlezak are co-trustees of the trust and exercise voting and
investment power with respect to the shares. The beneficiaries of such
trust are the children of Alfred Clark.
(4) The address of such trust is P.O. Box 1315 East Sound, Washington
98245.
(5) Consists of 141,464 shares held by the Seybold Family Trust. Mr.
Seybold is a Trustee of such trust, the beneficiaries of which are his
wife and children. The address of such individual is c/o Heuristic
Development Group, Inc., 17575 Pacific Coast Highway, Pacific
Palisades, California 90272.
(6) Includes 366,514 shares held by NGJ Ltd. Mr. Zink is the Chief
Operating Officer of NGJ Ltd. The address of such individual is c/o
Clark Management Co. Inc., P.O. Box 3090, Boynton Beach, Florida
33424.
(7) Includes options to purchase 38,110 shares of Common Stock, a portion
of which are being held in escrow. The address of such individual is
c/o Heuristic Development Group, Inc., 17575 Pacific Coast Highway,
Pacific Palisades, California 90272.
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(8) Includes options to purchase 40,564 shares of Common Stock, a portion
of which are being held in escrow. The address of such individual is
c/o Heuristic Development Group, Inc., 17575 Pacific Coast Highway,
Pacific Palisades, California 90272.
(9) Represents shares held by the Blase Family Trust, of which Dr. Blase
is Trustee. The address of such individual is c/o California Eye Care,
2390 East Florida Avenue, Suite 207, Hemet, California 92544.
(10) Represents shares held by TransPac. Mr. Krugler is the President of
TransPac. The address of such company is 467 Saratoga Avenue, Suite
550, San Jose, California 95129.
(11) The address of such individual is c/o Riverside Health System, 606
Denbigh Boulevard, Suite 604, Newport News, Virginia 23608
(12) The address of such individual is c/o Kent Spiegel Direct, Inc., 6133
Bristol Parkway, Culver City, California 90230.
Escrowed Shares and Options
In connection with the Offering, the holders of 349,370 shares of the
Company's Common Stock (the "Escrow Shares") and options to purchase 50,630
shares of the Company's Common Stock (the "Escrow Options") have agreed to place
the Escrow Shares and Escrow Options into escrow pursuant to an escrow agreement
(the "Escrow Agreement") with American Stock Transfer & Trust Company, as escrow
agent. The Escrow Shares and Escrow Options are not transferable or assignable;
except upon death, by operation of law, to family members of the holders or to
any trust for the benefit of the holders; provided that such transferees agree
to be bound by the provisions of the Escrow Agreement. The Escrow Shares may be
voted. Holders of Escrow Options may exercise their options prior to their
release from escrow; however, the shares issuable upon such exercise will
continue to be held as Escrow Shares pursuant to the Escrow Agreement.
The Escrow Shares and Escrow Options will be released from escrow if, and
only if, one or more of the following conditions is/are met:
(a) the Company's net income before provision for income taxes and
exclusive of any extraordinary earnings (all as audited by the
Company's independent public accountants) (the "Minimum Pretax
Income") amounts to at least $3.3 million for the fiscal year ending
December 31, 1998;
(b) the Minimum Pretax Income amounts to at least $4.5 million for the
fiscal year ending December 31, 1999;
(c) the Minimum Pretax Income amounts to at least $5.7 million during the
fiscal year ending December 31, 2000;
(d) the Bid Price (as defined in the Escrow Agreement) of the Common Stock
averages in excess of $12.50 per share for 30 consecutive business
days during the 18-month period commencing on the date of this
Prospectus; or
(e) the Bid Price of the Common Stock averages in excess of $16.75 per
share for 30 consecutive business days during the 18-month period
commencing with the nineteenth month from the date of this Prospectus.
The Minimum Pretax Income amounts set forth above shall (i) be calculated
exclusively of any extraordinary earnings, including any charge to income
resulting from release of the Escrow Shares and Escrow Options and (ii) be
increased proportionately, with certain limitations, in the event additional
shares of Common Stock or securities convertible into, exchangeable for or
exercisable into Common Stock are issued after completion of the Offering. The
Bid Price amounts set forth above are subject to adjustment in the event of any
stock splits, reverse stock splits or other similar events.
Any money, securities, rights or property distributed in respect of the
Escrow Shares and Escrow Options, including any property distributed as
dividends or pursuant to any stock split, merger, recapitalization, dissolution,
or total or partial liquidation of the Company, shall be held in escrow until
release of the Escrow Shares and Escrow Options. If none of the applicable
Minimum Pretax Income or Bid Price levels set forth above have been met by March
31, 2001, the Escrow Shares and Escrow Options, as well as any dividends or
other distributions made with respect thereto, will be cancelled and contributed
to the capital of the Company. The Company expects that the release of the
Escrow Shares and Escrow Options to officers, directors, employees and
consultants of the Company
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<PAGE>
will be deemed compensatory and, accordingly, will result in a substantial
charge to reportable earnings, which would equal the fair market value of such
shares on the date of release. Such charge could substantially increase the loss
or reduce or eliminate the Company's net income, if any, for financial reporting
purposes for the period during which such shares and options are, or become
probable of being, released from escrow. Although the amount of compensation
expense recognized by the Company will not affect the Company's total
stockholders' equity, it may have a negative effect on the market price of the
Company's securities. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note F of Notes to Financial
Statements.
The Minimum Pretax Income and Bid Price levels set forth above were
determined by negotiation between the Company and the Underwriter and should not
be construed to imply or predict any future earnings by the Company or any
increase in the market price of its securities.
The following sets forth the number of Escrow Shares and Escrow Options
held by executive officers, directors and principal stockholders of the Company:
Number of Number of
Name Escrow Shares Escrow Options
---- ------------- --------------
Nautilus Group Japan, Ltd................. 183,258 --
Clark Trust............................... 31,728 --
Jonathan W. Seybold....................... 70,732(1) --
Gregory L. Zink........................... 6,697 --
Steven R. Gumins.......................... -- 23,539
Deborah E. Griffin........................ -- 27,091
William Blase............................. 7,140(2) --
Kenneth W. Krugler ....................... 10,554(3) --
- ----------
(1) Represents shares owned by the Seybold Family Trust.
(2) Represents shares owned by the Blase Family Trust.
(3) Represents shares owned by TransPac.
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<PAGE>
CONCURRENT OFFERING
The registration statement of which this Prospectus forms a part also
includes a prospectus with respect to an offering by the Selling
Securityholders. The Selling Securityholders' Warrants are being issued to the
Selling Securityholders as of the effective date of the Offering upon the
automatic conversion of all of the Company's outstanding Bridge Warrants. These
Selling Securityholders' Warrants are identical to the Class A Warrants included
in the Units offered hereby. All of the Selling Securityholder Warrants issued
upon conversion of the Bridge Warrants, the Common Stock and Class B Warrants
issuable upon exercise of such Class A Warrants and the Common Stock issuable
upon exercise of the Class B Warrants will be registered, at the Company's
expense, under the Securities Act and are expected to become tradeable on or
about the closing of the Offering, subject to a contractual restriction that
such Class A Warrants and underlying securities may not be exercised, sold,
transferred, hypothecated, assigned or otherwise disposed of until one year
after the closing date of the Offering. After the one year period following the
closing date of the Offering, the Selling Securityholders may exercise and sell
the Common Stock issuable upon exercise of the Selling Securityholder Warrants
without restriction if a current prospectus relating to such Common Stock is in
effect and the securities are qualified for sale. The Company will not receive
any proceeds from the sale of the Selling Securityholder Warrants. Sales of
Selling Securityholder Warrants issued upon conversion of the Bridge Warrants or
the securities underlying such Class A Warrants or even the potential of such
sales could have an adverse effect on the market prices of the Units, the Common
Stock and the Warrants.
There are no material relationships between any of the Selling
Securityholders and the Company, nor have any such material relationships
existed within the past three years. The Company has been informed by the
Underwriter that there are no agreements between the Underwriter and any Selling
Securityholder regarding the distribution of the Selling Securityholder Warrants
or the underlying securities.
The sale of the securities by the Selling Securityholders may be effected
from time to time in transactions (which may include block transactions by or
for the account of the Selling Securityholders) in the over-the-counter market
or in negotiated transactions, a combination of such methods of sale or
otherwise. Sales may be made at fixed prices which may be changed, at market
prices or in negotiated transactions, a combination of such methods of sale or
otherwise.
Selling Securityholders may effect such transactions by selling their
securities directly to purchasers, through broker-dealers acting as agents for
the Selling Securityholders or to broker-dealers who may purchase shares as
principals and thereafter sell the securities from time to time in the
over-the-counter market, in negotiated transactions or otherwise. Such
broker-dealers, if any, may receive compensation in the form of discounts,
concessions or commissions from the Selling Securityholders and/or the
purchasers from whom such broker-dealer may act as agents or to whom they may
sell as principals or otherwise (which compensation as to a particular
broker-dealer may exceed customary commissions).
The Company has agreed not to solicit Warrant exercises other than through
the Underwriter, unless the Underwriter declines to make such solicitation. Upon
any exercise of the Warrants after the first anniversary of the date of this
Prospectus, the Company will pay the Underwriter a fee of 5% of the aggregate
exercise price of the Warrants, if (i) the market price of the Company's Common
Stock on the date the Warrants are exercised is greater than the then exercise
price of the Warrants; (ii) the exercise of the Warrants was solicited by a
member of the NASD; (iii) the Warrants are not held in a discretionary account;
(iv) disclosure of compensation arrangements was made both at the time of the
Offering and at the time of exercise of the Warrants; and (v) the solicitation
of exercise of the Warrant was not in violation of Regulation M promulgated
under the Exchange Act.
The Commission has recently adopted Regulation M which will replace Rule
10b-6 and certain other rules and regulations under the Exchange Act. Regulation
M will prohibit any person engaged in the distribution of the Selling
Securityholder' Warrants from simultaneously engaging in market-making
activities with respect to any securities of the Company during the applicable
"cooling-off" period (one or five business days) prior to the commencement of
such distribution. Accordingly, in the event the Underwriter or Blair & Co. is
engaged in a distribution of the Selling Securityholder Warrants, neither of
such firms will be able to make a market in the Company's securities during the
applicable restrictive period. However, neither the Underwriter nor Blair & Co.
has agreed to nor is either of them obligated to act as broker-dealer in the
sale of the Selling Securityholder Warrants and the Selling Securityholders may
be required, and in the event Blair & Co. is a market-maker, will likely be
required, to sell such securities through another broker-dealer. In addition,
each Selling Securityholder desiring to sell Warrants will be subject to the
applicable provisions of the Exchange Act and the rules and regulations
thereunder,
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<PAGE>
which provisions may limit the timing of the purchases and sales of shares of
the Company's securities by such Selling Securityholder.
The Selling Securityholders and broker-dealers, if any, acting in
connection with such sales might be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act and any commission received by
them and any profit on the resale of the securities might be deemed to be
underwriting discount and commissions under the Securities Act.
DESCRIPTION OF SECURITIES
The following description of the Company's securities does not purport to
be complete and is subject in all respects to applicable Delaware law and to the
provisions of the Company's Certificate of Incorporation and By-laws, the
Warrant Agreement among the Company, the Underwriter and American Stock Transfer
& Trust Company, as warrant agent, pursuant to which the Warrants will be issued
and the Underwriting Agreement between the Company and the Underwriter, copies
of all of which have been filed with the Commission as Exhibits to the
Registration Statement of which this Prospectus is a part.
General
The authorized capital stock of the Company consists of 20,000,000 shares
of Common Stock, $.01 par value, and 5,000,000 shares of "blank check" preferred
stock, $.01 par value ("Preferred Stock").
Units
Each Unit consists of one share of Common Stock, one redeemable Class A
Warrant and one redeemable Class B Warrant. Each Class A Warrant entitles the
holder thereof to purchase one share of Common Stock and one redeemable Class B
Warrant. Each Class B Warrant entitles the holder thereof to purchase one share
of Common Stock. The Common Stock and Warrants comprising the Units are
separately transferable immediately upon issuance.
Common Stock
The Company has outstanding 721,326 shares of Common Stock which includes
(i) an aggregate of 175,793 shares issuable on the completion of the Offering
upon the automatic conversion of Preferred Stock and (ii) an aggregate of
263,921 shares issuable on the completion of the Offering upon the automatic
conversion of the Stockholder Debt. Holders of Common Stock have the right to
cast one vote for each share held of record on all matters submitted to a vote
of holders of Common Stock, including the election of directors. There is no
right to cumulate votes for the election of directors. Stockholders holding a
majority of the voting power of the capital stock issued and outstanding and
entitled to vote, represented in person or by proxy, are necessary to constitute
a quorum at any meeting of the Company's stockholders, and the vote by the
holders of a majority of such outstanding shares is required to effect certain
fundamental corporate changes such as liquidation, merger or amendment of the
Company's Certificate of Incorporation.
Holders of Common Stock are entitled to receive dividends pro rata based on
the number of shares held, when, as and if declared by the Board of Directors,
from funds legally available therefor, subject to the rights of holders of any
outstanding preferred stock. In the event of the liquidation, dissolution or
winding up of the affairs of the Company, all assets and funds of the Company
remaining after the payment of all debts and other liabilities, subject to the
rights of the holders of any outstanding preferred stock, shall be distributed,
pro rata, among the holders of the Common Stock. Holders of Common Stock are not
entitled to preemptive or subscription or conversion rights, and there are no
redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are, and the shares of Common Stock offered
hereby will be when issued, fully paid and non-assessable.
Redeemable Warrants
Class A Warrants. Each Class A Warrant entitles the registered holder to
purchase one share of Common Stock and one Class B Warrant at an exercise price
of $6.50 at any time until 5:00 P.M., New York City time, on , 2002. Commencing
one year from the date of this Prospectus, the Class A Warrants are redeemable
by the Company on 30 days' written notice at a redemption price of $.05 per
Class A Warrant if the "closing price" of the Company's Common Stock for any 30
consecutive trading days ending within 15 days of the notice of
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<PAGE>
redemption averages in excess of $9.10 per share. "Closing price" shall mean the
closing bid price if listed in the over-the-counter market on Nasdaq or
otherwise or the closing sale price if listed on the Nasdaq National Market or a
national securities exchange. All Class A Warrants must be redeemed if any are
redeemed.
Class B Warrants. Each Class B Warrant entitles the registered holder to
purchase one share of Common Stock at an exercise price of $8.75 at any time
after issuance until 5:00 P.M. New York City Time, on , 2002. Commencing
one year from the date of this Prospectus, the Class B Warrants are redeemable
by the Company on 30 days' written notice at a redemption price of $.05 per
Class B Warrant, if the closing price (as defined above) of the Company's Common
Stock for any 30 consecutive trading days ending within 15 days of the notice of
redemption averages in excess of $12.25 per share. All Class B Warrants must be
redeemed if any are redeemed.
General. The Class A Warrants and Class B Warrants will be issued pursuant
to a warrant agreement (the "Warrant Agreement") among the Company, the
Underwriter and American Stock Transfer & Trust Company, New York, New York, as
warrant agent (the "Warrant Agent"), and will be evidenced by warrant
certificates in registered form. The Warrants provide for adjustment of the
exercise price and for a change in the number of shares issuable upon exercise
to protect holders against dilution in the event of a stock dividend, stock
split, combination or reclassification of the Common Stock or upon issuance of
shares of Common Stock at prices lower than the market price of the Common
Stock, with certain exceptions.
The exercise prices of the Warrants were determined by negotiation between
the Company and the Underwriter and should not be construed to be predictive of
or to imply that any price increases in the Company's securities will occur.
The Company has reserved from its authorized but unissued shares a
sufficient number of shares of Common Stock for issuance upon the exercise of
the Class A Warrants and the Class B Warrants. A Warrant may be exercised upon
surrender of the Warrant certificate on or prior to its expiration date (or
earlier redemption date) at the offices of the Warrant Agent, with the
Subscription Form on the reverse side of the Warrant certificate completed and
executed as indicated, accompanied by payment of the full exercise price (by
certified or bank check payable to the order of the Company) for the number of
shares with respect to which the Warrant is being exercised. Shares issued upon
exercise of Warrants and payment in accordance with the terms of the Warrants
will be fully paid and non-assessable.
For the life of the Warrants, the holders thereof have the opportunity to
profit from a rise in the market value of the Common Stock, with a resulting
dilution in the interest of all other stockholders. So long as the Warrants are
outstanding, the terms on which the Company could obtain additional capital may
be adversely affected. The holders of the Warrants might be expected to exercise
them at a time when the Company would, in all likelihood, be able to obtain any
needed capital by a new offering of securities on terms more favorable than
those provided for by the Warrants.
The Warrants do not confer upon the Warrantholder any voting or other
rights of a stockholder of the Company. Upon notice to the Warrantholders, the
Company has the right to reduce the exercise price or extend the expiration date
of the Warrants.
Unit Purchase Option
The Company has agreed to grant to the Underwriter and the Finder, upon the
closing of the Offering, the Unit Purchase Option and the Finder's Unit Purchase
Option to purchase up to an aggregate of 120,000 Units. These Units will be
identical to the Units offered hereby except that the Class A Warrants and the
Class B Warrants included in the Unit Purchase Option and the Finder's Unit
Purchase Option will only be subject to redemption by the Company at any time
after the Unit Purchase Option and the Finder's Unit Purchase Option have been
exercised and the underlying Warrants are outstanding. The Unit Purchase Option
and the Finder's Unit Purchase Option cannot be transferred, sold, assigned or
hypothecated for two years, except to any officer of the Underwriter or members
of the selling group or their officers. The Unit Purchase Option and the
Finder's Unit Purchase Option are exercisable during the three-year period
commencing two years from the date of this Prospectus at an exercise price of
$6.00 per Unit (120% of the initial public offering price) subject to adjustment
in certain events to protect against dilution. The holders of the Unit Purchase
Option and the Finder's Unit Purchase Option have certain demand and/or
piggyback registration rights. See "Underwriting."
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Preferred Stock
The Company currently has outstanding 600 shares of Series A Preferred
Stock, .01 par value, all of which are held by NGJ Ltd. NGJ Ltd. has agreed to
convert such shares into 175,793 shares of Common Stock on the completion of the
Offering.
After completion of the Offering, the class of Preferred Stock designated
as Series A Preferred Stock will be eliminated and the Company will be
authorized to issue up to 5,000,000 shares of "blank-check" Preferred Stock. The
Board of Directors will have the authority to issue this Preferred Stock in one
or more series and to fix the number of shares and the relative rights,
conversion rights, voting rights and terms of redemption (including sinking fund
provisions) and liquidation preferences, without further vote or action by the
stockholders. If shares of Preferred Stock with voting rights are issued, such
issuance could affect the voting rights of the holders of the Company's Common
Stock by increasing the number of outstanding shares having voting rights, and
by the creation of class or series voting rights. If the Board of Directors
authorizes the issuance of shares of Preferred Stock with conversion rights, the
number of shares of Common Stock outstanding could potentially be increased by
up to the authorized amount. Issuance of Preferred Stock could, under certain
circumstances, have the effect of delaying or preventing a change in control of
the Company and may adversely affect the rights of holders of Common Stock.
Also, Preferred Stock could have preferences over the Common Stock (and other
series of preferred stock) with respect to dividend and liquidation rights. The
Company currently has no plans to issue any Preferred Stock.
Transfer Agent
American Stock Transfer & Trust Company, New York, New York, serves as
Transfer Agent for the shares of Common Stock and Warrant Agent for the
Warrants.
Business Combination Provisions
The Company is subject to a Delaware statute regulating "business
combinations," defined to include a broad range of transactions, between
Delaware corporations and "interested stockholders," defined as persons who have
acquired at least 15% of a corporation's stock. Under the law, a corporation may
not engage in any business combination with any interested stockholder for a
period of three years from the date such person became an interested stockholder
unless certain conditions are satisfied. The statute contains provisions
enabling a corporation to avoid the statute's restrictions.
The Company has not sought to "elect out" of the statute and, therefore,
upon closing of the Offering and the registration of its shares of Common Stock
under the Exchange Act, the restrictions imposed by such statute will apply to
the Company.
Registration Rights
The holders of the Unit Purchase Option and Finder's Unit Purchase Option
will have demand and/or piggy-back registration rights relating to such options
and the underlying securities. See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering the Company will have outstanding 2,000,000
shares of Common Stock. Of these shares, the 1,200,000 shares of Common Stock
offered hereby will be freely transferable without restriction or further
registration under the Securities Act, unless purchased by affiliates of the
Company as that term is defined in Rule 144 under the Securities Act ("Rule
144") described below. The 721,326 shares of Common Stock currently outstanding
(giving effect to conversion of the Stockholder Debt and the Series A Preferred
Stock) are "restricted securities" or owned by affiliates within the meaning of
Rule 144 and may not be sold publicly unless they are registered under the
Securities Act or are sold pursuant to Rule 144 or another exemption from
registration. The 721,326 shares of Common Stock currently outstanding will be
eligible for sale in the public market pursuant to Rule 144 at various times
beginning 90 days after the date of this Prospectus. However, holders of the
outstanding shares have agreed not to sell or otherwise dispose of any shares of
Common Stock without the Underwriter's prior written consent for a period of 13
months after the date of this Prospectus. In addition, 349,370 of such shares
are Escrow Shares subject to the restrictions on transfer set forth in the
Escrow Agreement. See "Principal Stockholders -- Escrowed Shares and Options"
and "Underwriting."
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In general, under Rule 144 a person (or persons whose shares are
aggregated), including persons who may be deemed to be "affiliates" of the
Company as that term is defined under the Securities Act, is entitled to sell
within any three-month period a number of restricted shares beneficially owned
for at least two years that does not exceed the greater of (i) 1% of the then
outstanding shares of Common Stock or (ii) an amount equal to the average weekly
trading volume in the Common Stock during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain requirements as to the
manner of sale, notice and the availability of current public information about
the Company. However, a person who is not deemed an affiliate and has
beneficially owned such shares for at least three years is entitled to sell such
shares without regard to the volume or other resale requirements.
Under Rule 701 of the Securities Act, persons who purchase shares upon
exercise of options granted prior to the date of this Prospectus are entitled to
sell such shares after the 90th day following the date of this Prospectus in
reliance on Rule 144, without having to comply with the holding period
requirements of Rule 144 and, in the case of non-affiliates, without having to
comply with the public information, volume limitation or notice provisions of
Rule 144. Affiliates are subject to all Rule 144 restrictions after this 90-day
period, but without a holding period. If all the requirements of Rule 701 are
met, an aggregate of 78,674 shares subject to outstanding vested options
(including the Escrow Options) may be sold pursuant to such rule at the end of
this 90-day period, subject to (i) an agreement by all option holders not to
sell or otherwise dispose of any shares of Common Stock for a period of 13
months after the date of this Prospectus without the Underwriter's prior written
consent and (ii) the restrictions on transfer set forth in the Escrow Agreement.
See "Principal Stockholders -- Escrowed Shares and Options." An additional
100,000 shares may be sold from time to time pursuant to this rule as additional
outstanding options vest.
Pursuant to registration rights acquired in the Bridge Financing, the
Company has, concurrently with the Offering, registered for resale on behalf of
the Selling Securityholders, the Selling Securityholder Securities subject to
the contractual restriction that the Selling Securityholders agreed not to
exercise, sell, transfer, hypothecate, assign or otherwise dispose of the
Selling Securityholder Warrants for a period expiring one year after the closing
of the Offering.
The Underwriter and the Finder also have demand and/or "piggy-back"
registration rights with respect to the securities underlying the Unit Purchase
Option and the Finder's Unit Purchase Option. See "Underwriting."
Prior to the Offering, there has been no market for any securities of the
Company, and no predictions can be made of the effect, if any, that sales of
Common Stock or the availability of Common Stock for sale will have on the
market price of such securities prevailing from time to time. Nevertheless,
sales of substantial amounts of Common Stock in the public market could
adversely affect prevailing market prices.
39
<PAGE>
UNDERWRITING
D. H. Blair Investment Banking Corp., the Underwriter, has agreed, subject
to the terms and conditions of the Underwriting Agreement, to purchase from the
Company the 1,200,000 Units offered hereby on a "firm commitment" basis, if any
are purchased. It is expected that Blair & Co. will distribute as a selling
group member substantially all of the Units offered hereby. Blair & Co. is
substantially owned by family members of J. Morton Davis. Mr. Davis is the sole
stockholder of the Underwriter.
The Underwriter has advised the Company that it proposes to offer the Units
to the public at the public offering price set forth on the cover page of this
Prospectus and to certain dealers who are members of the NASD, at such prices
less concessions of not in excess of $ per Unit, of which a sum not in excess of
$ per Unit may in turn be reallowed to other dealers who are members of the
NASD. After the commencement of the offering, the public offering price, the
concession and the reallowance may be changed by the Underwriter.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act. The Company has
also agreed to pay to the Underwriter a non-accountable expense allowance equal
to 3% of the gross proceeds derived from the sale of Units offered hereby,
including any Units purchased pursuant to the Underwriter's overallotment
option, $40,000 of which has been paid to date. The Underwriter has agreed to
pay Marc J. Gorlin, the Finder, who is an unaffiliated party, $10,000 for
introducing the Company to the Underwriter. As discussed below, the Finder will
also receive the Finder's Unit Purchase Option.
The Company has granted to the Underwriter an option exercisable during the
30-day period commencing on the date of this Prospectus, to purchase from the
Company at the public offering price, less underwriting discounts, up to 180,000
additional Units for the purpose of covering over-allotments, if any.
All of the Company's current stockholders, officers and directors have
agreed not to sell, assign, transfer or otherwise dispose publicly of any of
their shares of Common Stock for a period of 13 months from the date of this
Prospectus without the prior written consent of the Underwriter.
The Underwriter has the right to designate one director to the Company's
Board of Directors for a period of five years from the completion of the
Offering, although it has not yet selected any such designee. Such designee may
be a director, officer, partner, employee or affiliate of the Underwriter.
During the five-year period from the date of this Prospectus, in the event
the Underwriter originates a financing or a merger, acquisition or a similar
transaction to which the Company is a party, the Underwriter will be entitled to
receive a finder's fee in consideration for origination of such transaction. The
fee is based on a percentage of the consideration paid in the transaction
ranging from 7% of the first $1,000,000 to 2 1/2% of any consideration in excess
of $9,000,000.
The Company has agreed not to solicit Warrant exercises other than through
the Underwriter, unless the Underwriter declines to make such solicitation. Upon
any exercise of the Warrants after the first anniversary of the date of this
Prospectus, the Company will pay the Underwriter a fee of 5% of the aggregate
exercise price of the Warrants, if (i) the market price of the Company's Common
Stock on the date the Warrants are exercised is greater than the then exercise
price of the Warrants; (ii) the exercise of the Warrants was solicited by a
member of the NASD; (iii) the Warrants are not held in a discretionary account;
(iv) disclosure of compensation arrangements was made both at the time of the
Offering and at the time of exercise of the Warrants; and (v) the solicitation
of exercise of the Warrant was not in violation of Regulation M.
The Commission has recently adopted Regulation M which will replace Rule
10b-6 and certain other rules promulgated under the Exchange Act. Regulation M
may prohibit Blair & Co. or any other soliciting broker-dealer from engaging in
any market making activities with regard to the Company's securities for the
period from five business days (or such other applicable period as Regulation M
may provide) prior to any solicitation by the Underwriter of the exercise of
Warrants until the later of the termination of such solicitation activity or the
termination (by waiver or otherwise) of any right that the Underwriter may have
to receive a fee for the exercise of Warrants following such solicitation. As a
result, Blair & Co. may be unable to provide a market for the Company's
securities during certain periods while the Warrants are exercisable.
The Company has agreed to sell to the Underwriter and its designees and the
Finder, for nominal consideration, the Unit Purchase Option and the Finder's
Unit Purchase Option to purchase up to 108,000 Units and 12,000 Units,
respectively, substantially identical to the Units being offered hereby, except
that the Class A Warrants and Class B
40
<PAGE>
Warrants included therein are subject to redemption by the Company at any time
after such options have been exercised and the underlying warrants are
outstanding. The Unit Purchase Option and the Finder's Unit Purchase Option will
be exercisable during the three-year period commencing two years from the date
of this Prospectus at an exercise price of $6.00 per Unit, subject to adjustment
in certain events to protect against dilution and are not transferable for a
period of two years from the date of this Prospectus except to officers of the
Underwriter or members of the selling group or their respective officers. The
Company has agreed upon request to register during the four-year period
commencing one year from the date of this Prospectus, on two separate occasions,
the securities issuable upon exercise of the Unit Purchase Option under the
Securities Act, the initial such registration to be at the Company's expense and
the second at the expense of the holders. The Company has also granted certain
"piggy-back" registration rights to holders of the Unit Purchase Option and the
Finder's Unit Purchase Option.
The Underwriter has informed the Company that it does not expect sales to
discretionary accounts to exceed 5% of the total number of the Units offered
hereby.
The Underwriter acted as Placement Agent for the Bridge Financing in
December 1996 for which it received a Placement Agent fee of $100,000 and a
non-accountable expense allowance of $30,000.
The Commission is conducting an investigation concerning various business
activities of the Underwriter and Blair & Co., a selling group member which will
distribute substantially all of the Units offered hereby. The investigation
appears to be broad in scope, involving numerous aspects of the Underwriter's
and Blair & Co.'s compliance with the Federal securities laws and compliance
with the Federal securities laws by issuers whose securities were underwritten
by the Underwriter or Blair & Co., or in which the Underwriter or Blair & Co.
made over-the-counter markets, persons associated with the Underwriter or Blair
& Co., such issuers and other persons. The Company has been advised by the
Underwriter that the investigation has been ongoing since at least 1989 and that
it is cooperating with the investigation. The Underwriter cannot predict whether
this investigation will ever result in any type of formal enforcement action
against the Underwriter or Blair & Co., or, if so, whether any such action might
have an adverse effect on the Underwriter or the securities offered hereby. The
Company has been advised that Blair & Co. will make a market in the securities
following this offering. An unfavorable resolution of the Commission's
investigation could have the effect of limiting such firm's ability to make a
market in the Company's securities, which could affect the liquidity or price of
such securities.
Prior to the Offering, there has been no public market for any of the
securities offered hereby. Accordingly, the public offering price of the Units
offered hereby and the terms of the Warrants have been determined by negotiation
between the Company and the Underwriter and are not necessarily related to the
Company's asset value, net worth or other established criteria of value. Factors
considered in determining such prices and terms, in addition to prevailing
market conditions, include the history of and the prospects for the industry in
which the Company competes, the present state of the Company's development and
its future prospects, an assessment of the Company's management, the Company's
capital structure, demand for similar securities of comparable companies and
such other factors as were deemed relevant.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Bachner, Tally, Polevoy & Misher LLP, New York, New York. Certain
legal matters will be passed upon for the Underwriter by Singer Zamansky LLP,
New York, New York. Bachner, Tally, Polevoy & Misher LLP represents the
Underwriter in other matters.
EXPERTS
The financial statements of the Company at December 31, 1995 and for the
year ended December 31, 1995, and the period from July 20, 1994 (commencement of
all operations) to December 31, 1995 appearing in this Prospectus and
Registration Statement have been audited by Richard A. Eisner & Company, LLP,
independent auditors, as set forth in their report thereon (which contains an
explanatory paragraph with respect to the uncertainty regarding the Company's
ability to continue as a going concern) appearing elsewhere herein and in the
Registration Statement, and are included in reliance upon such report given upon
the authority of such firm as experts in accounting and auditing.
41
<PAGE>
ADDITIONAL INFORMATION
The Company is not a reporting company under the Exchange Act. The Company
has filed a Registration Statement on Form SB-2 under the Securities Act with
the Commission in Washington, D.C. with respect to the Units offered hereby.
This Prospectus, which is part of the Registration Statement, does not contain
all of the information set forth in the Registration Statement and the exhibits
thereto. For further information with respect to the Company and the Units
offered hereby, reference is hereby made to the Registration Statement and such
exhibits, which may be inspected without charge at the office of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of
the Commission located at Seven World Trade Center, 13th Floor, New York, New
York 10048 and at 500 West Madison (Suite 1400), Chicago, Illinois 60661. Copies
of such material may also be obtained at prescribed rates from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549. The Commission maintains a web site that contains reports, proxy and
information statements and other information regarding issuers that file
electronically with the Commission. The address of such site is
http://www.sec.gov. Statements contained in this Prospectus as to the contents
of any contract or other document referred to are not necessarily complete and
in each instance reference is made to the copy of such contract or document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference.
Following the Offering, the Company will be subject to the reporting and
other requirements of the Exchange Act and intends to furnish to its
stockholders annual reports containing audited financial statements and may
furnish interim reports as it deems appropriate.
42
<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
------------
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors F-2
Balance Sheets F-3
Statements of Operations F-4
Statements of Changes in Stockholders
Equity (Captial Deficiency) F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Heuristic Development Group, Inc.
Pacific Palisades, California
We have audited the accompanying balance sheet of Heuristic Development
Group, Inc. (a development stage company) as at December 31, 1995, and the
related statements of operations, changes in stockholders' equity (capital
deficiency) and cash flows for each of the years in the two-year period then
ended and for the period from July 20, 1994 (inception) through December 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present
fairly, in all material respects, the financial position of Heuristic
Development Group, Inc. at December 31, 1995 and the results of its operations
and cash flows for each of the years in the two-year period then ended and for
the period from July 20, 1994 (inception) through December 31, 1995 in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note A to the
financial statements, the Company has sustained recurring losses from operations
and has a net working capital and capital deficiency that raises substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note A. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
RICHARD A. EISNER & COMPANY, LLP
New York, New York
September 18, 1996
F-2
<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
December 31, ------------------------------
1995 1996 1996
----------- ----------- -----------
(Unaudited) (Unaudited)
(Historical) (Pro Forma)
ASSETS
<S> <C> <C> <C>
Current assets:
Cash .................................................................... $ 279,000 $ 18,000 $ 998,000
Due from employees ...................................................... 3,000 3,000
Prepaid expenses and other current assets ............................... 5,000 2,000 2,000
----------- ----------- -----------
Total current assets ............................................ 284,000 23,000 1,003,000
Capitalized software costs ................................................ 267,000 267,000
Furniture and equipment (net of accumulated depreciation) ................. 205,000 199,000 199,000
Organizational costs (net of accumulated amortization) .................... 27,000 21,000 21,000
Deferred registration costs ............................................... 61,000 61,000
Deferred financing costs .................................................. 160,000
----------- ----------- -----------
Total ........................................................... $ 516,000 $ 571,000 $ 1,711,000
=========== =========== ===========
LIABILITIES
Current liabilities:
Accounts payable ........................................................ $ 92,000 $ 110,000 $ 110,000
Accrued expenses ........................................................ 26,000 23,000 23,000
Accrued payroll ......................................................... 24,000 25,000 25,000
Notes payable - stockholders ............................................ 250,000
Interest payable - stockholders ......................................... 28,000
----------- ----------- -----------
Total current liabilities ....................................... 142,000 436,000 158,000
Notes payable-- stockholders .............................................. 492,000 804,000 170,000
Interest payable-- stockholders ........................................... 18,000 32,000
Bridge notes, net of discount ............................................. 500,000
----------- ----------- -----------
Total ................................................. 652,000 1,272,000 828,000
----------- ----------- -----------
STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Preferred stock, $.01 par value, authorized 1,500 shares;
issued and outstanding 600 shares (liquidating preference
$682,000 at December 31, 1995 and $733,000 at
September 30, 1996) no shares issued and outstanding
at September 30, 1996 (pro forma)
Common stock - $.01 par value, authorized 20,000,000 shares;
issued and outstanding 276,475 shares at December 31, 1995
and 281,612 shares at September 30, 1996 (historical)
and 721,326 shares at September 30, 1996 (pro forma)
including 349,370 shares in escrow ...................................... 3,000 3,000 7,000
Additional paid-in capital ................................................ 967,000 1,252,000 2,954,000
(Deficit) accumulated during the development stage ........................ (1,106,000) (1,956,000) (2,078,000)
----------- ----------- -----------
Total stockholders' equity (capital deficiency) ................. (136,000) (701,000) 833,000
----------- ----------- -----------
Total ........................................................... $ 516,000 $ 571,000 $ 1,711,000
=========== =========== ===========
</TABLE>
The accompanying notes to financial statements
are an integral part thereof.
F-3
<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
July 20, 1994 July 20, 1994
(Inception) Nine Months Ended (Inception)
Year Ended December 31, to September 30, to
-------------------------- December 31, -------------------------- September 30,
1994 1995 1995 1995 1996 1996
----------- ----------- ----------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Costs and expenses:
Research and development:
Direct expenditures ................... $ 58,000 $ 280,000 $ 338,000 $ 118,000 $ 338,000
Payments under research
services agreement .................. 20,000 117,000 137,000 109,000 137,000
----------- ----------- ----------- ----------- -----------
Total research and development .. 78,000 397,000 475,000 227,000 475,000
General and administrative .............. 159,000 466,000 625,000 418,000 $ 808,000 1,433,000
----------- ----------- ----------- ----------- ----------- -----------
Total costs and expenses ........ 237,000 863,000 1,100,000 645,000 808,000 1,908,000
----------- ----------- ----------- ----------- ----------- -----------
(Loss) from operations .................... (237,000) (863,000) (1,100,000) (645,000) (808,000) (1,908,000)
Interest (expense) ........................ (18,000) (18,000) (7,000) (42,000) (60,000)
Interest income ........................... 7,000 5,000 12,000 5,000 12,000
----------- ----------- ----------- ----------- ----------- -----------
NET (LOSS) ................................ $ (230,000) $ (876,000) $(1,106,000) $ (647,000) $ (850,000) $(1,956,000)
=========== =========== =========== =========== =========== ===========
Pro forma net (loss) per share ............ $ (2.31) $ (2.17)
=========== -----------
Pro forma weighted average
shares outstanding 371,956 371,956
=========== ===========
</TABLE>
The accompanying notes to financial statements
are an integral part thereof.
F-4
<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
Par Value $.01 Par Value $.01 Additional
----------------- ------------------- Paid-in
Shares Amount Shares Amount Capital
------ ------ ------ ------ ---------
<S> <C> <C> <C> <C> <C>
Issuance of common stock for cash in August 1994............. 212,456 $2,000 $ 68,000
Issuance of preferred stock for cash in August 1994.......... 550 $-0- 550,000
Issuance of preferred stock in connection with
obtaining assignment rights to developed
technology in August 1994.................................. 50 50,000
Net (loss) for the period from July 20, 1994 (inception)
to December 31, 1994.......................................
--- ---- ------- ------ ----------
Balance-- December 31, 1994.................................. 600 -0- 212,456 2,000 668,000
Surrender of common stock in October 1995.................... (17,928)
Exercise of options in December 1995......................... 81,947 1,000 299,000
Net (loss) for the year ended December 31, 1995..............
--- ---- ------- ------ ----------
Balance-- December 31, 1995.................................. 600 -0- 276,475 3,000 967,000
Exercise of options in March 1996............................ 30,733 10,000
Issuance of common stock for cash in March 1996.............. 9,218 37,000
Surrender of common stock in March 1996...................... (21,770)
Surrender of common stock in June 1996....................... (15,239)
Exercise of options in August 1996........................... 5,358 2,000
Surrender of common stock in August 1996..................... (3,163)
Compensation expense in connection with grant of
option in August 1996...................................... 236,000
Net (loss) for the nine months ended September 30, 1996......
--- ---- ------- ------ ----------
Balance-- September 30, 1996 (unaudited)..................... 600 -0- 281,612 3,000 1,252,000
Pro forma adjustments (Note I):
Warrants issued in connection with Bridge notes............ 500,000
Conversion of preferred stock and accrued and unpaid
dividends to common stock.................................. (600) 175,793 2,000 120,000
Conversion of notes payable-- stockholders and
accrued interest to common stock........................... 263,921 2,000 1,082,000
--- ---- ------- ------ ----------
PRO FORMA BALANCE -- SEPTEMBER 30, 1996
(UNAUDITED)................................................ -0- $-0- 721,326 $7,000 $2,954,000
=== ==== ======= ====== ==========
</TABLE>
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY) (Continued)
<TABLE>
<CAPTION>
(Deficit)
Accumulated
During the
Development
Stage Total
----------- ----------
<S> <C> <C>
Issuance of common stock for cash in August 1994............. $ 70,000
Issuance of preferred stock for cash in August 1994.......... 550,000
Issuance of preferred stock in connection with
obtaining assignment rights to developed
technology in August 1994.................................. 50,000
Net (loss) for the period from July 20, 1994 (inception)
to December 31, 1994....................................... $ (230,000) (230,000)
----------- ----------
Balance-- December 31, 1994.................................. (230,000) 440,000
Surrender of common stock in October 1995....................
Exercise of options in December 1995......................... 300,000
Net (loss) for the year ended December 31, 1995.............. (876,000) (876,000)
----------- ----------
Balance-- December 31, 1995.................................. (1,106,000) (136,000)
Exercise of options in March 1996............................ 10,000
Issuance of common stock for cash in March 1996.............. 37,000
Surrender of common stock in March 1996......................
Surrender of common stock in June 1996.......................
Exercise of options in August 1996........................... 2,000
Surrender of common stock in August 1996.....................
Compensation expense in connection with grant of
option in August 1996...................................... 236,000
Net (loss) for the nine months ended September 30, 1996...... (850,000) (850,000)
----------- ----------
Balance-- September 30, 1996 (unaudited)..................... (1,956,000) (701,000)
Pro forma adjustments (Note I):
Warrants issued in connection with Bridge notes............ 500,000
Conversion of preferred stock and accrued and unpaid
dividends to common stock.................................. (122,000) -0-
Conversion of notes payable-- stockholders and
accrued interest to common stock........................... 1,084,000
----------- ----------
PRO FORMA BALANCE -- SEPTEMBER 30, 1996
(UNAUDITED)................................................ $(2,078,000) $ 883,000
=========== ==========
</TABLE>
The accompanying notes to financial statements
are an integral part thereof.
F-5
<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
July 20, 1994
(Inception)
Year Ended December 31, to
-------------------------- December 31,
1994 1995 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) ............................................... $ (230,000) $ (876,000) $(1,106,000)
Adjustments to reconcile net (loss) to net cash (used in)
operating activities:
Depreciation and amortization .......................... 9,000 25,000 34,000
Value of preferred stock charged to research
and development ...................................... 50,000 50,000
Fair value of options granted ..........................
Accrued interest on notes payable-- stockholders ....... 18,000 18,000
Changes in operating assets and liabilities:
(Increase) decrease in prepaid expenses .............. (7,000) 1,000 (6,000)
(Increase) in other assets ........................... (38,000) (38,000)
Increase in accounts payable and accrued expenses .... 30,000 111,000 141,000
----------- ----------- -----------
Net cash (used in) operating activities .......... (186,000) (721,000) (907,000)
----------- ----------- -----------
Cash flows from investing activities:
Acquisitions of fixed assets ............................. (40,000) (186,000) (226,000)
Advances to employees ....................................
Additions to capitalized software costs ..................
----------- ----------- -----------
Net cash (used in) investing activities .......... (40,000) (186,000) (226,000)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from sale of common stock and exercise of options 70,000 300,000 370,000
Proceeds from sale of preferred stock .................... 550,000 550,000
Proceeds from borrowings-- notes payable-- stockholders .. 492,000 492,000
Deferred financing costs .................................
----------- ----------- -----------
Net cash provided by financing activities ........ 620,000 792,000 1,412,000
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH ............................ 394,000 (115,000) 279,000
Cash-- beginning of period ................................. 394,000
----------- ----------- -----------
CASH-- END OF PERIOD ....................................... $ 394,000 $ 279,000 $ 279,000
=========== =========== ===========
Supplemental disclosure of cash flow information:
Noncash transactions:
Preferred stock issued in connection with
assignment agreement ................................. $ 50,000 $ 50,000
</TABLE>
STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
July 20, 1994
Nine Months Ended (Inception)
September 30, to
-------------------------- September 30,
1995 1996 1996
----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) ............................................... $ (647,000) $ (850,000) $(1,956,000)
Adjustments to reconcile net (loss) to net cash (used in)
operating activities:
Depreciation and amortization .......................... 16,000 38,000 72,000
Value of preferred stock charged to research
and development ...................................... 50,000
Fair value of options granted .......................... 236,000 236,000
Accrued interest on notes payable-- stockholders ....... 7,000 42,000 60,000
Changes in operating assets and liabilities:
(Increase) decrease in prepaid expenses .............. 3,000 3,000 (3,000)
(Increase) in other assets ........................... (38,000)
Increase in accounts payable and accrued expenses .... 57,000 18,000 159,000
----------- ----------- -----------
Net cash (used in) operating activities .......... (564,000) (513,000) (1,420,000)
----------- ----------- -----------
Cash flows from investing activities:
Acquisitions of fixed assets ............................. (72,000) (28,000) (254,000)
Advances to employees .................................... (3,000) (3,000)
Additions to capitalized software costs .................. (267,000) (267,000)
----------- ----------- -----------
Net cash (used in) investing activities .......... (72,000) (298,000) (524,000)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from sale of common stock and exercise of options 49,000 419,000
Proceeds from sale of preferred stock ................... 550,000
Proceeds from borrowings-- notes payable-- stockholders .. 250,000 562,000 1,054,000
Deferred financing costs ................................. (61,000) (61,000)
----------- ----------- -----------
Net cash provided by financing activities ........ 250,000 550,000 1,962,000
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH ............................ (386,000) (261,000) 18,000
Cash-- beginning of period ................................. 394,000 279,000
----------- ----------- -----------
CASH-- END OF PERIOD ....................................... $ 8,000 $ 18,000 $ 18,000
=========== =========== ===========
Supplemental disclosure of cash flow information:
Noncash transactions:
Preferred stock issued in connection with
assignment agreement ................................. $ 50,000
</TABLE>
The accompanying notes to financial statements
are an integral part thereof.
F-6
<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited with respect to September 30, 1996 and September 30, 1995)
(NOTE A) -- The Company and Basis of Presentation:
Heuristic Development Group, Inc. (the "Company" or "HDG"), formerly
EIS International Group, Ltd., is a development stage company. The Company is
engaged in the marketing and sale of the IntelliFit System, a computerized
system which generates personalized exercise prescriptions based on, among other
things, an individual's weight, ability, medical history, goals, fitness level
and exercise preferences and tracks and records fitness progress. The Company
was incorporated in Delaware and commenced operations on July 20, 1994. The
Company has not yet generated any revenue.
As reflected in the accompanying financial statements, the Company has
incurred substantial losses since inception and such losses are expected to
continue during the development stage. As at September 30, 1996, the Company has
a working capital and a capital deficiency. These factors raise substantial
doubt about its ability to continue as a going concern. Management's plans
include the following:
a) Obtain a minimum of $500,000 through the sale of Bridge Units
consisting of a $50,000 promissory note and two-year warrants (Note I).
b) Obtain net proceeds of approximately $5,220,000 through the sale of
1,200,000 units consisting of common stock and a Class A and a Class B
warrant in a public offering (see Note F).
c) (i) Convert all of the Series A preferred stock including accrued
and unpaid dividends aggregating $722,000 at August 31, 1996 into 175,793
shares of common stock and (ii) convert notes payable -- stockholders
including accrued interest aggregating $1,084,000 into 263,921 shares of
common stock.
Management of the Company believes that if the foregoing plan is
accomplished, the Company will remain viable at least through September 1997.
There is no assurance that the above plans can be accomplished. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
(NOTE B) -- Summary of Significant Accounting Policies:
[1] Capitalized software costs:
In accordance with Statement of Financial Accounting Standards No. 86, the
Company capitalizes certain costs associated with the development of computer
software. Such costs will be amortized over their estimated useful lives,
usually seven years. Amortization will commence when the Company has revenue.
Development costs incurred prior to achievement of technological
feasibility (December 31, 1995) are expensed.
[2] Property and equipment:
Property and equipment are carried at cost. Depreciation is provided using
the straight-line method over the useful lives of the assets which range from
three to seven years.
[3] Income taxes:
The Company has applied to the accompanying financial statements provisions
required by accounting standards which requires the use of the liability method
of accounting for income taxes.
[4] Pro forma net loss per share of common stock:
Pro forma net loss per share assumes the conversion of preferred stock and
notes payable -- stockholders as if such transactions had occurred on January 1,
1995. The stockholders have agreed to place 349,370 shares in escrow and,
accordingly, such shares have been excluded from the computation.
F-7
<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited with respect to September 30, 1996 and
September 30, 1995) (Continued)
(NOTE B) -- Summary of Significant Accounting Policies: (Continued)
[5] Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of expenses during the reporting period.
Actual results could differ from those estimates.
[6] Recent pronouncements:
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). The Company will adopt the disclosure requirements of SFAS 123 during the
Company's fiscal year ending December 31, 1996 but will account for its stock
option plans under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" as permitted under SFAS 123.
In addition, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121").
SFAS 121 is also effective for the Company's fiscal year ending December 31,
1996. The Company believes adoption of SFAS No. 121 will not have a material
impact on its financial statements.
[7] Organizational costs:
Organizational costs incurred by the Company are being amortized over five
years.
[8] Fair value of financial instruments:
The carrying value of cash, accounts payable and notes payable approximates
fair value because of the short-term maturity of those instruments. For other
debt instruments, the carrying value approximates the fair value based on stated
interest rates.
[9] Interim financial information:
The financial information presented as of September 30, 1996 and for the
nine-month periods ended September 30, 1996 and September 30, 1995 is unaudited,
but in the opinion of management contains all adjustments (consisting of only
normal recurring adjustments) necessary for a fair presentation of such
financial information. Results of operations for interim periods are not
necessarily indicative of those to be achieved for full fiscal years.
(NOTE C) -- Property and Equipment:
Property and equipment are summarized as follows:
December 31, September 30,
1995 1996
-------- --------
Assembled units......................... $107,000 $107,000
Components in process and on hand....... 29,000 29,000
Furniture and fixtures.................. 8,000 29,000
Office equipment........................ 65,000 70,000
Leasehold improvements.................. 17,000 18,000
-------- --------
226,000 253,000
Less accumulated depreciation .......... 21,000 54,000
-------- --------
Balance........................... $205,000 $199,000
======== ========
F-8
<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited with respect to September 30, 1996 and
September 30, 1995) (Continued)
(NOTE D) -- Notes Payable -- Stockholders:
During the year ended December 31, 1995 and the nine months ended September
30, 1996, the Company borrowed approximately $550,000 and $1,024,000,
respectively, from certain stockholders. These notes bear an interest rate of
10%.
Approximately $250,000 of the notes and accrued interest of approximately
$26,000 were due in June 1996. Subsequent to June 1996, the due date was
extended to June 1997. (See Note A with respect to proposed conversion of notes
payable.)
Future principal payments on long-term debt are as follows:
December 31, September 30,
1995 1996
-------- ---------
1997..................................... $250,000 $ 250,000
2000..................................... 242,000 242,000
2001..................................... 562,000
-------- ---------
$492,000 $1,054,000
======== =========
The interest on these notes is payable on the due dates of the notes.
(NOTE E) -- Stockholders' Equity (Capital Deficiency):
[1] Preferred stock:
In August 1994, the Company authorized and issued 600 shares of its $.01
par value Series A preferred stock (the "Series A Preferred"). The holders of
the Series A Preferred are entitled to (i) vote on all matters on which the
common stock can vote and have twenty percent of the total voting power, (ii)
receive cumulative annual dividends equal to $100 per share and (iii)
liquidation preference of $1,000 per share plus any dividends accrued and
unpaid. The Series A Preferred is redeemable at the option of the Company at a
price of $1,000 per share plus accrued and unpaid dividends. (See Note A with
respect to proposed conversion of preferred stock.)
[2] Stock options:
Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
Shares Option Price Expiration Date
------- ------------ ---------------
<S> <C> <C> <C>
Granted-- year ended December 31, 1994............ 115,359 $ .33-$3.67 December 1995-August 1996
Granted-- year ended December 31, 1995............ 2,679 $ .33 August 1997-August 1999
Exercised-- year ended December 31, 1995.......... (81,947) $3.67
-------
Balance at December 31, 1995...................... 36,091 $ .33 May 1996-August 1999
Granted-- August 1996............................. 78,674 $ .50 August 2006
Exercised-- nine months
ended September 30, 1996........................ (36,091) $ .33
-------
Balance at September 30, 1996..................... 78,674 $ .50 August 2006
=======
</TABLE>
In August 1996, the Company issued to two officers/ stockholders options to
purchase 78,674 shares of its common stock at $.50 per share. The Company has
reflected compensation expense of $236,000 in connection with the issuance of
such options. In connection with the proposed public offering, these options are
subject to escrow provisions as a condition of the offering (Note F).
F-9
<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited with respect to September 30, 1996 and
September 30, 1995) (Continued)
(NOTE E) -- Stockholders' Equity (Capital Deficiency): (Continued)
[3] Stock Option Plan:
In October 1996, the Company adopted the 1996 Stock Option Plan (the
"Plan") which provides for issuance of 250,000 shares of the Company's common
stock. In October 1996, stock options to purchase 200,000 shares of common stock
at $5.00 per share were granted to officers/stockholders.
[4] Reorganization:
In October 1996, the Board of Directors and stockholders approved a
1,339.4362 to 1 stock split which has been given retroactive effect in the
accompanying financial statements. All references to shares and per share
amounts in the notes to financial statements have been adjusted to reflect the
stock split.
(NOTE F) -- Proposed Public Offering:
The Company signed a letter of intent with an underwriter with respect to a
proposed public offering of the Company's securities. There is no assurance that
such offering will be consummated. In connection therewith the Company
anticipates incurring substantial expenses which, if the offering is not
consummated, will be charged to expense.
In connection with such offering, the underwriter has required, as a
condition of the offering, that an aggregate of 349,370 shares of the Company's
common stock and outstanding options to purchase 50,630 shares be placed in
escrow until certain pretax income levels or market value targets are met. If
the conditions are not met by March 31, 2001, all shares remaining in escrow
will be returned to the Company as treasury shares for cancellation. There will
be a nondeductible charge to earnings for the fair value of these shares upon
their release.
(NOTE G) -- Commitments and Other Matters:
Research Services Agreement:
In August 1994, the Company entered into a retainer agreement with Transpac
Software, Inc. ("Transpac"). The agreement provides for Transpac to assist the
Company in updating and improving the source programs and in designing,
developing and implementing such improved source programs for use in the EIS
Expert Instructor System. The agreement provides for the payment of $120,000.
Accordingly, the Company paid Transpac $20,000 during the year ended December
31, 1994 and $100,000 during the year ended December 31, 1995.
In addition, the agreement provides for additional services upon the
Company's request in designated, scheduled projects through December 31, 1998.
During the year ended December 31, 1995 and the nine months ended September 30,
1996, the Company paid Transpac approximately $10,000 and $79,000, respectively,
for additional services.
Employment agreements:
The Company has three-year, employment agreements with two officers
providing for aggregate annual base salaries of $300,000 commencing December 1,
1996. The agreements provide for bonuses at the discretion of the Board and
severance salary as defined in the agreements.
F-10
<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited with respect to September 30, 1996 and
September 30, 1995) (Continued)
(NOTE H) -- Income Taxes:
At December 31, 1995 and September 30, 1996, the Company had available net
operating loss carryforwards to reduce future taxable income of approximately
$456,000 and $710,000, respectively. The net operating loss carryforwards expire
in various amounts through 2011. The Company's ability to utilize its net
operating loss carryforwards may be subject to annual limitations pursuant to
Section 382 of the Internal Revenue Code if future changes in ownership occur.
At December 31, 1995 and September 30, 1996, the Company has a deferred tax
asset of approximately $400,000 and $765,000, respectively, representing the
benefits of its net operating loss carryforwards and deferred taxes resulting
from capitalized start-up costs, cash basis tax reporting and compensation
expense in connection with the grant of options. The Company has provided a 100%
valuation allowance for such asset since the likelihood of realization cannot be
determined.
(NOTE I) -- Pro Forma Financial Information:
The pro forma balance sheet and statement of changes of stockholders'
equity (capital deficiency) give effect to the following transactions as though
they had occurred on September 30, 1996.
a. Bridge financing:
In December 1996, the Company issued Bridge notes aggregating
$1,000,000 which bear interest at 10% per annum and are due the earlier of
December 2, 1997 or the completion of the proposed public offering. In
connection with the sale of the notes, the Company issued warrants for the
purchase of 500,000 shares of common stock commencing December 2, 1998.
Upon completion of the contemplated public offering, the warrants will be
converted into Class A Warrants containing the same terms as the warrants
included in units expected to be sold in such public offering. The warrants
have been valued at $500,000 by application of the Black-Scholes model and
will be accounted for as debt discount which will be amortized over the
life of the loan.
In addition, the Company incurred costs in connection with obtaining
the financing of approximately $ 160,000 which will be amortized over the
life of the loan. The effective interest rate on the notes is 304%.
b. Additional borrowings from stockholders aggregating $140,000, bearing
interest at 10% and repayable at the earlier of five years or the effective date
of the Company's proposed public offering.
c. Conversion of notes payable -- stockholders' (Note A).
d. Conversion of preferred stock (Note A).
F-11
<PAGE>
================================================================================
No dealer, salesman or other person has been authorized to give any
information or to make any representations, other than those contained in this
Prospectus, and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company or by the Underwriter.
This Prospectus does not constitute an offer to sell, or a solicitation of an
offer to buy, any securities offered hereby by anyone in any jurisdiction in
which such offer or solicitation is not authorized or in which the person making
such offer or solicitation is not qualified to do so or to anyone to whom it is
unlawful to make such offer, or solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that the information herein contained is correct as of any time
subsequent to the date of this Prospectus.
------------
TABLE OF CONTENTS
Page
----
Prospectus Summary ........................................................ 3
Risk Factors .............................................................. 6
Use of Proceeds and Plan of Operations .................................... 12
Dividend Policy............................................................ 12
Capitalization ............................................................ 13
Dilution .................................................................. 15
Selected Financial Data ................................................... 16
Managements' Discussion and Analysis of
Financial Condition and Results of Operations............................ 17
Business .................................................................. 19
Management ................................................................ 27
Certain Transactions ...................................................... 31
Principal Stockholders .................................................... 32
Concurrent Offering ....................................................... 35
Description of Securities ................................................. 36
Shares Eligible
for Future Sale ......................................................... 38
Underwriting .............................................................. 40
Legal Matters ............................................................. 41
Experts ................................................................... 41
Additional Information .................................................... 42
Index to Financial Statements ............................................. F-1
------------
Until , 1997, all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a Prospectus. This is in addition to the obligation of dealers to
deliver a Prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
================================================================================
================================================================================
1,200,000 Units
HEURISTIC
DEVELOPMENT
GROUP, INC.
Consisting of 1,200,000 shares of
Common Stock,
1,200,000 Redeemable Class A
Warrants
and
1,200,000 Redeemable Class B
Warrants
---------------
PROSPECTUS
---------------
D.H. BLAIR INVESTMENT
BANKING CORP.
, 1997
================================================================================
<PAGE>
Alternate Prospectus Page
SUBJECT TO COMPLETION -- DATED JANUARY 31, 1997
PROSPECTUS
HEURISTIC DEVELOPMENT GROUP, INC.
500,000 Redeemable Class A Warrants
500,000 Shares of Common Stock and
500,000 Redeemable Class B Warrants issuable upon exercise of the
Redeemable Class A Warrants and 500,000 Shares of
Common Stock issuable upon exercise of the Class B Warrants
This Prospectus relates to 500,000 Redeemable Class A Warrants (the
"Selling Securityholder Warrants" or the "Class A Warrants") of Heuristic
Development Group, Inc., a Delaware corporation (the "Company"), held by 36
holders (the "Selling Securityholders"), the 500,000 shares of Common Stock,
$.01 par value ("Common Stock"), and 500,000 Redeemable Class B Warrants ("Class
B Warrants") issuable upon the exercise of the Selling Securityholder Warrants,
and 500,000 shares of Common Stock issuable upon exercise of such Class B
Warrants. The Selling Securityholder Warrants and the Class B Warrants are
referred to herein collectively as the "Warrants" and the securities issuable
upon exercise of the Selling Securityholder Warrants, together with the Selling
Securityholder Warrants, are sometimes collectively referred to herein as the
"Selling Securityholder Securities." The Selling Securityholder Warrants were
issued to the Selling Securityholders in exchange for warrants they received in
a private placement by the Company in December, 1996 (the "Bridge Financing").
See "Selling Securityholders" and "Plan of Distribution." Each Selling
Securityholder Warrant entitles the holder to purchase, at an exercise price of
$6.50, subject to adjustment, one share of Common Stock and one Class B Warrant,
and each Class B Warrant entitles the holder to purchase, at an exercise price
of $8.75, subject to adjustment, one share of Common Stock. The Warrants are
exercisable at any time after issuance through the fifth anniversary of the
closing of the offering (the "Offering") contemplated by this Prospectus
provided that the Selling Securityholders have agreed not to exercise the
Selling Securityholder Warrants for a period of one year from the date of the
closing of the Offering and not to sell the Selling Securityholder Warrants
except after the restrictive periods described under "Plan of Distribution."
Commencing one year from the date hereof, the Warrants are subject to redemption
by the Company for $.05 per Warrant, upon 30 days' written notice, if the
average closing bid price of the Common Stock exceeds $9.10 per share with
respect to the Class A Warrants and $12.25 share with respect to the Class B
Warrants (subject to adjustment in each case) for 30 consecutive business days
ending within 15 days of the date of the notice of redemption. See "Description
of Securities."
The securities offered by the Selling Securityholders by this Prospectus
may be sold from time to time by the Selling Securityholders or by their
transferees. The distribution of the Class A Warrants, Common Stock and the
Class B Warrants offered hereby by the Selling Securityholders may be effected
in one or more transactions that may take place on the over-the-counter market,
including ordinary brokers' transactions, privately negotiated transactions or
through sales to one or more dealers for resale of such securities as
principals, at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices. Usual and customary or
specifically negotiated brokerage fees or commissions may be paid by the Selling
Securityholders.
The Selling Securityholders, and intermediaries through whom such
securities are sold, may be deemed underwriters within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
securities offered, and any profits realized or commissions received may be
deemed underwriting compensation. The Company has agreed to indemnify the
Selling Securityholders against certain liabilities, including liabilities under
the Securities Act.
The Company will not receive any of the proceeds from the sale of
securities by the Selling Securityholders. In the event the Selling
Securityholder Warrants are exercised, the Company will receive gross proceeds
of $ . See "Selling Securityholders" and "Plan of Distribution."
On the date of this Prospectus, a registration statement under the
Securities Act with respect to an underwritten public offering by the Company
(the "Offering") of 1,200,000 Units, each Unit consisting of one share of Common
Stock, one Class A Warrant and one Class B Warrant, was declared effective by
the Securities and Exchange Commission (the "Commission"). The Company will
receive approximately $4,775,000 in net proceeds from the Offering (assuming no
exercise of the Underwriter's over-allotment option) after payment of
underwriting discounts and commissions and estimated expenses of the Offering.
AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE .
------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------
The date of this Prospectus is , 1997
<PAGE>
Alternate Prospectus Page
SELLING SECURITYHOLDERS
An aggregate of up to 500,000 Class A Warrants, 500,000 shares of Common
Stock and 500,000 Class B Warrants issuable upon exercise of such Class A
Warrants and 500,000 shares of Common Stock issuable upon exercise of such Class
B Warrants may be offered for resale by investors who received their Class A
Warrants in exchange for warrants received in the Bridge Financing.
The following table sets forth certain information with respect to each
Selling Securityholder for whom the Company is registering the Selling
Securityholder Securities for resale to the public. The Company will not receive
any of the proceeds from the sale of such securities. To the Company's knowledge
there are no material relationships between any of the Selling Securityholders
and the Company, nor have any such material relationships existed within the
past three years.
<TABLE>
<CAPTION>
Number of Class A Warrants
Beneficially Owned and
Selling Securityholders Maximum Number to be Sold(1)
-------------------- -----------------------------
<S> <C>
Jack A. Bova ........................................................................... 18,750
Nicholas Casale ........................................................................ 6,250
Yong S. Chen ........................................................................... 6,250
Yong S. Chen M.D. Pension Plan.......................................................... 6,250
CRC Communities ........................................................................ 6,250
Digestive Health Associates
Profit Sharing Plan..................................................................... 12,500
E&M RP Trust........................................................................... 25,000
J. Thomas Esslinger..................................................................... 12,500
Steven A. Finkler....................................................................... 12,500
Charles L. Fougerousse.................................................................. 6,250
Robert Franco........................................................................... 6,250
Mark Gilder and Judy Gilder, JTWROS..................................................... 12,500
Ross H. Golding......................................................................... 12,500
Richard C. Lehman....................................................................... 12,500
Loveless OrhopaediCare Profit Sharing Plan.............................................. 12,500
H. John Lyke........................................................................... 25,000
Paul K. Manger and Nancy S. Manger, JTWROS.............................................. 25,000
Arthur M. Marush, M.D................................................................... 18,750
Gary W. Mockler......................................................................... 18,750
Nano-Cap Hyper Growth Partnership L.P................................................... 12,500
Eugene F. Obermeyer and Barbara H. Obermeyer, JTWROS.................................... 25,000
Edwards O. Parry, Jr.................................................................... 12,500
The Mary Patoff Revocable Trust UA DTD 7/8/96........................................... 12,500
Phillip J. Picchietti................................................................... 6,250
Pattabhiraman Rajendran and Pindi L. Rajendran, JTWROS.................................. 12,500
Tushar Ramani........................................................................... 6,250
Brigid Ramchandran and Anjur Ramchandran, JTWROS........................................ 12,500
Sanford Schmookler and Alice Schmookler, JTWROS......................................... 6,250
Ira M. Shepard.......................................................................... 6,250
Doug Terry.............................................................................. 37,500
William P. Tinkler, Jr.................................................................. 25,000
Goss Townes............................................................................. 12,500
Sherwyn Wayne........................................................................... 12,500
George J. Wegler Trust.................................................................. 12,500
Richard D. Wilkinson.................................................................... 6,250
Robert D. Zucker........................................................................ 25,000
</TABLE>
- --------
(1) Does not include shares of Common Stock issuable upon exercise of the Class
A Warrants and issuable upon exercise of the Class B Warrants issuable upon
exercise of the Class A Warrants. The Selling Securityholders have agreed
not to exercise the Class A Warrants being offered hereby for a period of
one year from the date of this Prospectus. None of the Selling
Securityholders beneficially own in excess of 1% of the outstanding shares
of Common Stock after the Offering.
A-2
<PAGE>
PLAN OF DISTRIBUTION
The sale of the securities by the Selling Securityholders may be effected
from time to time in transactions (which may include block transactions by or
for the account of the Selling Securityholders) in the over-the-counter market
or in negotiated transactions, through the writing of options on the securities,
a combination of such methods of sale or otherwise. Sales may be made at fixed
prices which may be changed, at market prices prevailing at the time of sale or
at negotiated prices.
The Selling Securityholders may effect such transactions by selling their
securities directly to purchasers, through broker-dealers acting as agents for
the Selling Securityholders or to broker-dealers who may purchase shares as
principals and thereafter sell the securities from time to time in the
over-the-counter market in negotiated transactions or otherwise. Such
broker-dealers, if any, may receive compensation in the form of discounts,
concessions or commissions from the Selling Securityholders or the purchasers
for whom such broker-dealers may act as agents or to whom they may sell as
principals or otherwise (which compensation as to a particular broker-dealer may
exceed customary commissions).
Each Selling Securityholder has agreed not to exercise, sell, transfer,
hypothecate, assign or otherwise dispose of the Selling Securityholder Warrants
until one year after the closing of the Offering. Purchasers of the Selling
Securityholder Warrants will not be subject to such restrictions.
The Company has agreed not to solicit Warrant exercises other than through
the Underwriter of the Company's initial public office, unless the Underwriter
declines to make such solicitation. Upon any exercise of the Warrants after the
first anniversary of the date of this Prospectus, the Company will pay the
Underwriter a fee of 5% of the aggregate exercise price of the Warrants, if (i)
the market price of the Company's Common Stock on the date the Warrants are
exercised is greater than the then exercise price of the Warrants; (ii) the
exercise of the Warrants was solicited by a member of the NASD; (iii) the
Warrants are not held in a discretionary account; (iv) disclosure of
compensation arrangements was made both at the time of the Offering and at the
time of exercise of the Warrants; and (v) the solicitation of exercise of the
Warrant was not in violation of Regulation M promulgated under the Exchange Act.
The Commission has recently adopted Regulation M which will replace Rule
10b-6 and certain other rules and regulations under the Securities Exchange Act
of 1934, as amended ("Exchange Act"). Regulation M will prohibit any person
engaged in the distribution of the Selling Securityholder Warrants from
simultaneously engaging in market making activities with respect to any
securities of the Company during the applicable "cooling-off" period (one or
five business days) prior to the commencement of such distribution. Accordingly,
in the event the Underwriter or D.H. Blair & Co. Inc. ("Blair") is engaged in a
distribution of the Selling Securityholder Warrants, neither of such firms will
be able to make a market in the Company's securities during the applicable
restrictive period. However, neither the Underwriter nor Blair have agreed to
nor are either of them obliged to act as broker/dealer in the sale of the
Selling Securityholder Warrants and the Selling Securityholders may be required,
and in the event Blair is a market maker, will likely be required, to sell such
securities through another broker/dealer. In addition, each Selling
Securityholder desiring to sell Warrants will be subject to the applicable
provisions of the Exchange Act and the rules and regulations thereunder, which
provisions may limit the timing of the purchases and sales of shares of the
Company's securities by such Selling Securityholders.
The Selling Securityholders and broker-dealers, if any, acting in connection
with such sale might be deemed to be underwriters within the meaning of Section
2(11) of the Securities Act and any commission received by them and any profit
on the resale of the securities might be deemed to be underwriting discounts and
commissions under the Securities Act.
CONCURRENT PUBLIC OFFERING
On the date of this Prospectus, a Registration Statement was declared
effective under the Securities Act with respect to an underwritten offering by
the Company of 1,200,000 Units by the Company and up to 180,000 additional Units
to cover over-allotments, if any.
A-3
<PAGE>
Alternate Prospectus Page
================================================================================
No dealer, salesman or other person has been authorized to give any
information or to make any representations, other than those contained in this
Prospectus, and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company or by the Underwriter.
This Prospectus does not constitute an offer to sell, or a solicitation of an
offer to buy, any securities offered hereby by anyone in any jurisdiction in
which such offer or solicitation is not authorized or in which the person making
such offer or solicitation is not qualified to do so or to anyone to whom it is
unlawful to make such offer, or solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that the information herein contained is correct as of any time
subsequent to the date of this Prospectus.
------------
TABLE OF CONTENTS
Page
----
Prospectus Summary.........................................................
Risk Factors...............................................................
Use of Proceeds and Plan of Operations ....................................
Dividend Policy............................................................
Capitalization.............................................................
Dilution...................................................................
Selected Financial Data....................................................
Management's Discussion and Analysis of
Financial Condition and Results of Operations............................
Business...................................................................
Management.................................................................
Certain Transactions.......................................................
Principal Stockholders.....................................................
Selling Securityholders....................................................
Plan of Distribution.......................................................
Concurrent Public Offering.................................................
Description of Securities..................................................
Shares Eligible for Future Sale............................................
Legal Matters..............................................................
Experts....................................................................
Additional Information.....................................................
Index to Financial Statements.............................................. F-1
------------
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HEURISTIC
DEVELOPMENT
GROUP, INC.
500,000 Redeemable Class A
Warrants
500,000 Shares of Common Stock and
500,000 Redeemable Class B
Warrants
issuable upon exercise of the
Redeemable Class A Warrants and
500,000 Shares of Common Stock
issuable upon exercise of the Class B
Warrants
---------------
PROSPECTUS
---------------
, 1997
================================================================================
<PAGE>
PART II
Information Not Required in Prospectus
Item 24. Indemnification of Directors and Officers
The Restated Certificate of Incorporation and By-Laws of the Registrant
provide that the Registrant shall indemnify any person to the full extent
permitted by the Delaware General Corporation Law (the "GAL"). Section 145 of
the GAL, relating to indemnification, is hereby incorporated herein by
reference.
In accordance with Section 102(a)(7) of the GAL, the Certificate of
Incorporation of the Registrant eliminates the personal liability of directors
to the Registrant or its stockholders for monetary damages for breach of
fiduciary duty as a director with certain limited exceptions set forth in
Section 102(a)(7).
The Registrant also intends to enter into indemnification agreements with
each of its officers and directors, the form of which is filed as Exhibit 10.3
and reference is hereby made to such form of agreement.
Reference is made to Section 6 of the Underwriting Agreement (Exhibit 1.1)
which provides for indemnification by the Underwriter of the Registrant, its
officers and directors.
Item 25. Other Expenses of Issuance and Distribution
The estimated expenses payable by the Registrant in connection with the
issuance and distribution of the securities being registered (other than
underwriting discounts and commissions) are as follows:
Amount
--------
SEC Registration Fee .............................................. $ 15,680
NASD Filing Fees .................................................. 5,625
Nasdaq Filing Fees ................................................ 10,000
Printing and Engraving Expenses ................................... 85,000
Accounting Fees and Expenses ...................................... 100,000
Legal Fees and Expenses ........................................... 180,000
Blue Sky Fees and Expenses ........................................ 40,000
Transfer Agent's Fees and Expenses ................................ 3,500
Underwriter's Non-Accountable Expense Allowance ................... 180,000
Miscellaneous Expenses ............................................ 5,195
--------
Total ......................................................... $ 625,000
========
Item 26. Recent Sales of Unregistered Securities
The following discussion gives retroactive effect to the stock split
effected in October 1996. Since its organization in July 1994, the Registrant
has sold and issued the following unregistered securities:
In August 1994, the Registrant issued 29,880.14 shares of Common Stock to
Steven R. Gumins for $8,784.29 in cash, 29,880.14 shares of Common Stock to
Deborah E. Griffin for $8,784.29 in cash, 1,339.44 shares of Common Stock to Jay
Shapiro for $438.60 in cash, 13,394.40 shares of Common Stock to Kimitane Sohma
for $4,386.00 in cash, 3,013.73 shares of Common Stock to CMC Partners for
$986.85 in cash (these shares were transferred to Clark Management Co. Inc. in
September 1996), 63,455.79 shares of Common Stock to Clark Trust u/t/d 6/30/69
for $20,778.68 in cash, 9,019 shares of Common Stock to ACC Trust for $2,960.55
in cash, 4,520.60 shares of Common Stock to Brooks Trust, 10/7/72 for $1,480.28
in cash, 13,394.36 shares of Common Stock to Gregory L. Zink for $4,386.00 in
cash, 3,013.56 shares of Common Stock to Arcadian & Co., L.P. for $986.85 in
cash, 1,339.44 shares of Common Stock to John Dobbs for $438.60 in cash,
18,752.64 shares of Common Stock to Jerald N. Downen for $6,140.40 in cash,
20,091.54 shares of Common Stock to Michael A. Hertzberg for $6,579.00 in cash
and 1,339.44 shares of Common Stock to R. Brett Lunger for $438.60 in cash.
In August 1994, pursuant to an Assignment Agreement between the Registrant
and NGJ Ltd., the Registrant issued 50 shares of Series A Preferred Stock to NGJ
Ltd. in consideration for an assignment of all of NGJ Ltd.'s right, title and
interest in and to the EIS System and the Trademark. In August 1994, the
Registrant issued 550 shares of Series A Preferred Stock to NGJ Ltd. for $550,00
in cash.
II-1
<PAGE>
In August 1994, pursuant to a Non-Qualified Stock Option Agreement, the
Registrant granted to TransPac an option to purchase 30,733.36 shares of Common
Stock. Such Option was amended to decrease the number of shares of Common Stock
purchasable upon exercise of the Option to 13,177.37. In February 1996, TransPac
exercised the Option and the Registrant issued 13,177.37 shares of Common Stock
to TransPac for $10,063.67.
In August 1994, pursuant to a Non-Qualified Stock Option Agreement, the
Registrant granted to Eric Rhodes an option to purchase 2,678.87 shares of
Common Stock. In September 1996, Mr. Rhodes exercised the Option and the
Registrant issued 2,678.87 shares of Common Stock to Mr. Rhodes for $877.20.
In August 1994, pursuant to a NonQualified Stock Option Agreement, the
Registrant granted to Jonathan W. Seybold an option to purchase 61,466.73 shares
of Common Stock. Such Option was amended on December 28, 1995 to increase the
number of shares of Common Stock purchasable upon exercise of the Option to
81,946.71. On December 29, 1995, Mr. Seybold exercised the Option and the
Registrant issued 81,946.71 shares of Common Stock to Mr. Seybold for $300,000.
In August 1994, pursuant to a Non-Qualified Stock Option Agreement, the
Registrant granted to Dr. William Blase an option to purchase 2,678.87 shares of
Common Stock. In September 1996, Dr. Blase exercised the Option and the
Registrant issued 2,678.87 shares of Common Stock to Dr. Blase for $877.20. In
March 1996, the Registrant issued 9,218 shares of Common Stock to Dr. Blase for
$37,500.00 in cash.
In August 1996, the Registrant also issued 40,564 options to purchase
Common Stock to Ms. Griffin and 38,110 options to purchase Common Stock to Mr.
Gumins, each at an exercise price of $.50 per share. In October 1996, the
Company issued 100,000 options to purchase Common Stock to each of Deborah E.
Griffin and Steven R. Gumins, each at an exercise price of $5.00 per share.
The above transactions were private transactions not involving a public
offering and were exempt from the registration provisions of the Securities Act
of 1933, as amended, pursuant to Section 4(2) thereof. The sale of securities
was without the use of an underwriter, and the certificates evidencing the
shares bear a restrictive legend permitting the transfer thereof only upon
registration of the shares or an exemption under the Securities Act of 1933, as
amended.
In December 1996, the Registrant issued 20 units, each unit consisting of a
note in the principal amount of $50,000 bearing interest at 10% per annum and
warrants to purchase 25,000 shares of Common Stock at an exercise price of $3.00
per share (assuming the offering contemplated by this Registration Statement is
not consummated) to 36 accredited investors for an aggregate purchase price of
$1,000,000.
The units were issued pursuant to an exemption from registration provided
by Regulation D promulgated under Section 4(2) of the Securities Act. The
Underwriter acted as the Registrant's placement agent in connection with this
private placement. In connection therewith, the Registrant paid sales
commissions in the aggregate amount of $100,000 and a non-accountable expense
allowance in the aggregate amount of $30,000.
Item 27. Exhibits and Financial Statement Schedules
(a) Exhibits
1.1 -- Form of Underwriting Agreement
3.1 -- Form of Certificate of Incorporation of the Registrant, as
amended*
3.2 -- By-laws of the Registrant*
4.1 -- Form of Bridge Note*
4.2 -- Bridge Warrant Agreement*
4.3 -- Form of Warrant Agreement*
4.4 -- Form of Underwriter's Unit Purchase Option*
4.5 -- Form of Finder's Unit Purchase Option*
5.1 -- Opinion of Bachner, Tally, Polevoy & Misher LLP*
10.1 -- 1996 Stock Option Plan*
10.2 -- Form of Escrow Agreement by and between the Registrant,
American Stock Transfer & Trust Company and certain
securityholders of the Registrant*
10.3 -- Form of Indemnification Agreement*
10.4 -- Assignment dated August 22, 1994 between Nautilus Group
Japan, Ltd. and the Company*
II-2
<PAGE>
10.5 -- Exclusive Distribution License Agreement dated June 1995
between Nautilus Group Japan, Ltd. and the Company*
10.6 -- Letter Agreement dated November 27, 1996 between Nautilus
Group Japan, Ltd. and the Company*
10.7 -- Office Lease dated August 1, 1996 between Paulistic
Productions and the Company*
10.8 -- Retainer Agreement dated August 16, 1994 between TransPac
Software Inc. and the Company*
10.9 -- Employment Agreement dated as of December 1, 1996 between
the Company and Steven R. Gumins*
10.10 -- Employment Agreement dated as of December 1, 1996 between
the Company and Deborah E. Griffin*
10.11 -- Form of Conversion Agreement between the Company and the
holders of Indebtedness*
10.12 -- Conversion Agreement between the Company and Nautilus Group
Japan, Ltd.*
23.1 -- Consent of Bachner, Tally, Polevoy & Misher LLP -- Included
in Exhibit 5.1*
23.2 -- Consent of Richard A. Eisner & Company, LLP -- Included on
Page II-5*
24.1 -- Power of Attorney -- Included on Page II-6*
- ----------
* Previously filed.
Item 28. Undertakings
(1) The undersigned Registrant hereby undertakes that it will:
(a) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act,
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement, and
(iii) Include any additional or changed material information on
the plan of distribution.
(b) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.
(c) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of this offering.
(2) The undersigned Registrant hereby undertakes to provide to the
Underwriter at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriter to permit prompt delivery to each purchaser.
(3) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(4) The undersigned Registrant hereby undertakes that it will:
(a) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4), or
497(h) under the Securities Act as part of this registration statement as
of the time it was declared effective.
(b) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and the offering of such securities at that time as the initial
bona fide offering of those securities.
II-3
<PAGE>
CONSENT OF COUNSEL
The consent of Bachner, Tally, Polevoy & Misher is contained in its opinion
filed as Exhibit 5.1 to the Registration Statement.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has authorized this Registration
Statement or Amendment thereto to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Pacific Palisades, State of California
on the 31st day of January, 1997.
HEURISTIC DEVELOPMENT GROUP, INC.
By: /s/ Johnathan W. Seybold
--------------------------------
Jonathan W. Seybold,
Chairman of the Board
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement or Amendment thereto has been signed by the following
persons in the capacities and on the dates stated.
<TABLE>
<CAPTION>
Signature Title Date
------- ---- ----
<S> <C> <C>
/s/ Jonathan W. Seybold Chairman of the Board January 31, 1997
-------------------------------------- (principal executive officer)
Jonathan W. Seybold
/s/ Gregory L. Zink President, Chief Financial Officer January 31, 1997
-------------------------------------- and Director (principal financial
Gregory L. Zink officer and principal accounting
officer)
/s/ Steven R. Gumins Director January 31, 1997
-------------------------------------
Steven R. Gumins
/s/ Deborah E. Griffin Director January 31, 1997
-------------------------------------
Deborah E. Griffin
* Director January 31, 1997
-------------------------------------
William Blase
* Director January 31, 1997
-------------------------------------
Kenneth W. Krugler
* Director January 31, 1997
-------------------------------------
M. Caroline Martin
* Director January 31, 1997
-------------------------------------
Allan Dalfen
* By: /s/ Gregory L. Zink
- --------------------------------
Gregory L. Zink
Attorney-in-fact
</TABLE>
II-5
1,200,000 Units
(each Unit consisting of (i) one share of Common Stock, par
value $.01 per share; (ii) one redeemable Class A warrant to purchase
one share of Common Stock and one redeemable Class B warrant
and (iii) one redeemable Class B warrant)
HEURISTIC DEVELOPMENT GROUP, INC.
UNDERWRITING AGREEMENT
----------------------
D.H. Blair Investment Banking Corp. February __ , 1997
44 Wall Street
New York, New York 10005
Heuristic Development Group, Inc., a Delaware corporation (the "Company"),
proposes to issue and sell to D.H. Blair Investment Banking Corp. (the
"Underwriter") in accordance with the terms of this Underwriting Agreement (the
"Agreement"), an aggregate of 1,200,000 Units, each unit being hereinafter
referred to as a "Unit" and consisting of (i) one share of Common Stock, par
value $.01 per share ("Shares"), (ii) one redeemable Class A warrant ("Class A
Warrants") to purchase one share of Common Stock and one redeemable Class B
warrant ("Class B Warrant") at a price of $6.50 from _______, 1997 to_______,
2002 and (iii) one Class B Warrant exercisable to purchase one Share at a price
of $8.75 from _____, 1997 to _____, 2002. The Class A Warrants and Class B
Warrants are collectively referred to as the "Warrants." The Warrants are
subject to redemption, in certain instances commencing one year from the date of
this Agreement. In addition, the Company proposes to grant to the Underwriter
the option referred to in Section 2(b) to purchase all or any part of an
aggregate of 180,000 additional Units. Unless the context otherwise indicates,
the term "Units" shall include the 180,000 additional Units referred to above.
The aggregate of 1,200,000 Units to be sold by the Company, together with
all or any part of the 180,000 Units which the Underwriter has the option to
purchase, and the Shares and the Warrants comprising such Units, are herein
called the "Units." The Common Stock of the Company to be outstanding after
giving effect to the sale of the Shares is herein called the "Common Stock." The
Shares and Warrants included in the Units (including the Units which the
Underwriter has the option to purchase) are herein collectively called the
"Securities."
You have advised the Company that you desire to purchase the Units. The
Company confirms the agreements made by it with respect to the purchase of the
Units by you, as follows:
1. Representations and Warranties of the Company. The Company represents
and warrants to, and agrees with, the Underwriter that:
<PAGE>
(a) A registration statement (File No. 333-17635) on Form SB-2 relating to
the public offering of the Units, including a form of prospectus subject to
completion, copies of which have heretofore been delivered to you, has been
prepared by the Company in conformity with the requirements of the Securities
Act of 1933, as amended (the "Act"), and the rules and regulations (the "Rules
and Regulations") of the Securities and Exchange Commission (the "Commission")
thereunder, and has been filed with the Commission under the Act and one or more
amendments to such registration statement may have been so filed. After the
execution of this Agreement, the Company will file with the Commission either
(i) if such registration statement, as it may have been amended, has been
declared by the Commission to be effective under the Act, either (A) if the
Company relies on Rule 434 under the Act, a Term Sheet (as hereinafter defined)
relating to the Units that shall identify the Preliminary Prospectus (as
hereinafter defined) that it supplements containing such information as is
required or permitted by Rules 434, 430A and 424(b) under the Act or (B) if the
Company does not rely on Rule 434 under the Act a prospectus in the form most
recently included in an amendment to such registration statement (or, if no such
amendment shall have been filed, in such registration statement), with such
changes or insertions as are required by Rule 430A under the Act or permitted by
Rule 424(b) under the Act and in the case of either clause (i)(A) or (i)(B) of
this sentence, as have been provided to and approved by you prior to the
execution of this Agreement, or (ii) if such registration statement, as it may
have been amended, has not been declared by the Commission to be effective under
the Act, an amendment to such registration statement, including a form of
prospectus, a copy of which amendment has been furnished to and approved by you
prior to the execution of this Agreement.
As used in this Agreement, the term "Registration Statement" means such
registration statement, as amended at the time when it was or is declared
effective, including all financial schedules and exhibits thereto and including
any information omitted therefrom pursuant to Rule 430A under the Act and
included in the Prospectus (as hereinafter defined); the term "Preliminary
Prospectus" means each prospectus subject to completion filed with such
registration statement or any amendment thereto (including the prospectus
subject to completion, if any, included in the Registration Statement or any
amendment thereto at the time it was or is declared effective); the term
"Prospectus" means (A) if the Company relies on Rule 434 under the Act, the Term
Sheet relating to the Units that is first filed pursuant to Rule 424(b)(7) under
the Act, together with the Preliminary Prospectus identified therein that such
Term Sheet supplements; (B) if the Company does not rely on Rule 434 under the
Act, the prospectus first filed with the Commission pursuant to Rule 424(b)
under the Act or (C) if the Company does not rely on Rule 434 under the Act and
if no prospectus is required to be filed pursuant to said Rule 424(b), such term
means the prospectus included in the Registration Statement; except that if such
registration statement or prospectus is amended or such prospectus is
supplemented, after the effective date of such registration statement and prior
to the Option Closing Date (as hereinafter defined), the terms "Registration
Statement" and "Prospectus" shall include such registration statement and
prospectus as so amended, and the term "Prospectus" shall include the prospectus
as so supplemented, or both, as the case may be; and the term "Term Sheet" means
-2-
<PAGE>
any term sheet that satisfies the requirements of Rule 434 under the Act. Any
reference to the "date" of a Prospectus that includes a Term Sheet shall mean
the date of such Term Sheet.
(b) The Commission has not issued any order preventing or suspending the
use of any Preliminary Prospectus. At the time the Registration Statement
becomes effective and at all times subsequent thereto up to and on the Closing
Date (as hereinafter defined) or the Option Closing Date, as the case may be,
(i) the Registration Statement and Prospectus will in all respects conform to
the requirements of the Act and the Rules and Regulations; and (ii) neither the
Registration Statement nor the Prospectus will include any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make statements therein not misleading; provided, however, that
the Company makes no representations, warranties or agreements as to information
contained in or omitted from the Registration Statement or Prospectus in
reliance upon, and in conformity with, written information furnished to the
Company by or on behalf of the Underwriter specifically for use in the
preparation thereof. It is understood that the statements set forth in the
Prospectus on page 2 with respect to stabilization, under the heading "Risk
Factors-Possible Adverse Effect on Liquidity of the Company's Securities Due to
the Investigation of D.H. Blair Investment Banking Corp. and D.H. Blair & Co.,
Inc. by the Securities and Exchange Commission", under the heading
"Underwriting" and the identity of counsel to the Underwriter under the heading
"Legal Matters" constitute the only information furnished in writing by or on
behalf of the Underwriter for inclusion in the Registration Statement and
Prospectus, as the case may be.
(c) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, with full power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectus and is duly
qualified to do business as a foreign corporation and is in good standing in all
other jurisdictions in which the nature of its business or the character or
location of its properties requires such qualification, except where failure to
so qualify will not materially affect the Company's business, properties or
financial condition.
(d) The authorized, issued and outstanding capital stock of the Company as
of September 30, 1996 is as set forth in the Prospectus under "Capitalization";
the shares of issued and outstanding capital stock of the Company set forth
thereunder have been duly authorized, validly issued and are fully paid and
non-assessable; except as set forth in the Prospectus, no options, warrants, or
other rights to purchase, agreements or other obligations to issue, or
agreements or other rights to convert any obligation into, any shares of capital
stock of the Company have been granted or entered into by the Company; and the
capital stock conforms to all statements relating thereto contained in the
Registration Statement and Prospectus.
(e) The Units and the Shares are duly authorized, and when issued and
delivered pursuant to this Agreement, will be duly authorized, validly issued,
fully paid and nonassessable and free of preemptive rights of any security
holder of the Company. Neither the filing of the Registration Statement nor the
offering or sale of the Units as contemplated in this Agreement gives rise to
any rights, other than those which have been waived or satisfied, or relating to
the registration of any shares of Common Stock, except as described in the
Registration Statement.
-3-
<PAGE>
The Warrants have been duly authorized and, when issued and delivered
pursuant to this Agreement, will have been duly executed, issued and delivered
and will constitute valid and legally binding obligations of the Company
enforceable in accordance with their terms and entitled to the benefits provided
by the warrant agreement pursuant to which such Warrants are to be issued (the
"Warrant Agreement"), which will be substantially in the form filed as an
exhibit to the Registration Statement. The shares of Common Stock issuable upon
exercise of the Warrants have been reserved for issuance upon the exercise of
the Warrants and when issued in accordance with the terms of the Warrants and
Warrant Agreement, will be duly and validly authorized, validly issued, fully
paid and non-assessable and free of preemptive rights and no personal liability
will attach to the ownership thereof. The Warrant Agreement has been duly
authorized and, when executed and delivered pursuant to this Agreement, will
have been duly executed and delivered and will constitute the valid and legally
binding obligation of the Company enforceable in accordance with its terms. The
Warrants and the Warrant Agreement conform to the respective descriptions
thereof in the Registration Statement and Prospectus.
The Shares and the Warrants contained in the Unit Purchase Option and the
Finder's (as hereinafter defined) have been duly authorized and, when duly
issued and delivered, such Warrants will constitute valid and legally binding
obligations of the Company enforceable in accordance with their terms and
entitled to the benefits provided by the Unit Purchase Option and Finder's UPO.
The Shares included in the Unit Purchase Option and Finder's UPO (and the shares
of Common Stock issuable upon exercise of such Warrants) when issued and sold,
will be duly authorized, validly issued, fully paid and non-assessable and free
of preemptive rights and no personal liability will attach to the ownership
thereof.
(f) This Agreement, the Unit Purchase Option, the Finder's UPO, the M/A
Agreement (as hereinafter defined) and the Escrow Agreement (as hereinafter
defined) have been duly and validly authorized, executed and delivered by the
Company. The Company has full power and lawful authority to authorize, issue and
sell the Units to be sold by it hereunder on the terms and conditions set forth
herein, and no consent, approval, authorization or other order of any
governmental authority is required in connection with such authorization,
execution and delivery or with the authorization, issue and sale of the Units or
the Unit Purchase Option or Finder's UPO, except such as may be required under
the Act or state securities laws.
(g) Except as described in the Prospectus, the Company is not in violation,
breach or default of or under, and consummation of the transactions herein
contemplated and the fulfillment of the terms of this Agreement will not
conflict with, or result in a breach or violation of, any of the terms or
provisions of, or constitute a default under, or result in the creation or
imposition of any lien, charge or encumbrance upon any of the property or assets
of the Company pursuant to the terms of any indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument to which the Company is a party
or by which the Company may be bound or to which any of the property or assets
of the Company is subject, nor will such action result in any violation of the
provisions of the articles of incorporation or the by-laws of the Company, as
amended, or any statute or any order, rule or regulation applicable to
-4-
<PAGE>
the Company of any court or of any regulatory authority or other governmental
body having jurisdiction over the Company.
(h) Subject to the qualifications stated in the Prospectus, the Company has
good and marketable title to all properties and assets described in the
Prospectus as owned by it, free and clear of all liens, charges, encumbrances or
restrictions, except such as are not materially significant or important in
relation to its business; all of the material leases and subleases under which
the Company is the lessor or sublessor of properties or assets or under which
the Company holds properties or assets as lessee or sublessee as described in
the Prospectus are in full force and effect, and, except as described in the
Prospectus, the Company is not in default in any material respect with respect
to any of the terms or provisions of any of such leases or subleases, and no
claim has been asserted by anyone adverse to rights of the Company as lessor,
sublessor, lessee or sublessee under any of the leases or subleases mentioned
above, or affecting or questioning the right of the Company to continued
possession of the leased or subleased premises or assets under any such lease or
sublease except as described or referred to in the Prospectus; and the Company
owns or leases all such properties described in the Prospectus as are necessary
to its operations as now conducted and, except as otherwise stated in the
Prospectus, as proposed to be conducted as set forth in the Prospectus.
(i) Richard A. Eisner & Company LLP, who have given their reports on
certain financial statements filed and to be filed with the Commission as a part
of the Registration Statement, which are incorporated in the Prospectus, are
with respect to the Company, independent public accountants as required by the
Act and the Rules and Regulations.
(j) The financial statements, together with related notes, set forth in the
Prospectus (or if the Prospectus is not in existence, the most recent
Preliminary Prospectus) present fairly the financial position and results of
operations and changes in cash flow position of the Company on the basis stated
in the Registration Statement, at the respective dates and for the respective
periods to which they apply. Said statements and related notes have been
prepared in accordance with generally accepted accounting principles applied on
a basis which is consistent during the periods involved. The information set
forth under the captions "Dilution", "Capitalization", and "Selected Financial
Data" in the Prospectus fairly present, on the basis stated in the Prospectus,
the information included therein. The pro forma financial information filed as
part of the Registration Statement or included in the Prospectus (or such
preliminary prospectus) has been prepared in accordance with the Commission's
rules and guidelines with respect to pro forma financial statements, and
includes all adjustments necessary to present fairly the pro forma financial
condition and results of operations at the respective dates and for the
respective periods indicated and all assumptions used in preparing such pro
forma financial statements are reasonable.
(k) Subsequent to the respective dates as of which information is given in
the Registration Statement and Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), the Company has not incurred
any liabilities or obligations, direct
-5-
<PAGE>
or contingent, not in the ordinary course of business, or entered into any
transaction not in the ordinary course of business, which is material to the
business of the Company, and there has not been any change in the capital stock
of, or any incurrence of short-term or long-term debt by, the Company or any
issuance of options, warrants or other rights to purchase the capital stock of
the Company or any adverse change or any development involving, so far as the
Company can now reasonably foresee a prospective adverse change in the condition
(financial or other), net worth, results of operations, business, key personnel
or properties of it which would be material to the business or financial
condition of the Company and the Company has not become a party to, and neither
the business nor the property of the Company has become the subject of, any
material litigation whether or not in the ordinary course of business.
(l) Except as set forth in the Prospectus, there is not now pending or, to
the knowledge of the Company, threatened, any action, suit or proceeding to
which the Company is a party before or by any court or governmental agency or
body, which might result in any material adverse change in the condition
(financial or other), business prospects, net worth, or properties of the
Company, nor are there any actions, suits or proceedings related to
environmental matters or related to discrimination on the basis of age, sex,
religion or race; and no labor disputes involving the employees of the Company
exist or are imminent which might be expected to adversely affect the conduct of
the business, property or operations or the financial condition or results of
operations of the Company.
(m) Except as disclosed in the Prospectus, the Company has filed all
necessary federal, state and foreign income and franchise tax returns and has
paid all taxes shown as due thereon; and there is no tax deficiency which has
been or to the knowledge of the Company might be asserted against the Company.
(n) The Company has sufficient licenses, permits and other governmental
authorizations currently required for the conduct of its business or the
ownership of its properties as described in the Prospectus and is in all
material respects complying therewith and owns or possesses adequate rights to
use all material patents, patent applications, trademarks, service marks,
trade-names, trademark registrations, service mark registrations, copyrights and
licenses necessary for the conduct of such business and had not received any
notice of conflict with the asserted rights of others in respect thereof. To the
best knowledge of the Company, none of the activities or business of the Company
are in violation of, or cause the Company to violate, any law, rule, regulation
or order of the United States, any state, county or locality, or of any agency
or body of the United States or of any state, county or locality, the violation
of which would have a material adverse impact upon the condition (financial or
otherwise), business, property, prospective results of operations, or net worth
of the Company.
(o) The Company has not, directly or indirectly, at any time (i) made any
contributions to any candidate for political office, or failed to disclose fully
any such contribution in violation of law or (ii) made any payment to any state,
federal or foreign governmental officer or official, or other person charged
with similar public or quasi-public
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<PAGE>
duties, other than payments or contributions required or allowed by applicable
law. The Company's internal accounting controls and procedures are sufficient to
cause the Company to comply in all material respects with the Foreign Corrupt
Practices Act of 1977, as amended.
(p) On the Closing Dates (hereinafter defined) all transfer or other taxes,
(including franchise, capital stock or other tax, other than income taxes,
imposed by any jurisdiction) if any, which are required to be paid in connection
with the sale and transfer of the Units to the Underwriter hereunder will have
been fully paid or provided for by the Company and all laws imposing such taxes
will have been fully complied with.
(q) All contracts and other documents of the Company which are, under the
Rules and Regulations, required to be filed as exhibits to the Registration
Statement have been so filed.
(r) The Company has not taken and will not take, directly or indirectly,
any action designed to cause or result in, or which has constituted or which
might reasonably be expected to constitute, the stabilization or manipulation of
the price of the shares of Common Stock to facilitate the sale or resale of the
Units hereby.
(s) The Company has no subsidiaries.
(t) The Company has not entered into any agreement pursuant to which any
person is entitled either directly or indirectly to compensation from the
Company for services as a finder in connection with the proposed public offering
other than Mr. Marc J. Gorlin.
(u) Except as previously disclosed in writing by the Company to the
Underwriter, no officer, director or stockholder of the Company has any
affiliation or association with any member of the National Association of
Securities Dealers Inc. ("NASD").
(v) The Company is not, and upon receipt of the proceeds from the sale of
the Units will not be, an "investment company" within the meaning of the
Investment Company Act of 1940, as amended, and the rules and regulations
thereunder.
(w) The Company has not distributed and will not distribute prior to the
First Closing Date any offering material in connection with the offering and
sale of the Units other than the Preliminary Prospectus, Prospectus, the
Registration Statement or the other materials permitted by the Act, if any.
(x) The conditions for use of Form SB-2, as set forth in the General
Instructions thereto, have been satisfied.
(y) There are no business relationships or related-party transactions of
the nature described in Item 404 of Regulation S-K involving the Company and
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<PAGE>
any person described in such Item that are required to be disclosed in the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) and that have not been so disclosed.
(z) The Company has complied with all provisions of Section 517.075 Florida
Statutes relating to doing business with the government of Cuba or with any
person or affiliate located in Cuba.
2. Purchase, Delivery and Sale of the Units.
(a) Subject to the terms and conditions of this Agreement, and upon the
basis of the representations, warranties, and agreements herein contained, the
Company agrees to issue and sell to the Underwriter, and such Underwriter
agrees, to buy from the Company at $ 4.50 per Unit, at the place and time
hereinafter specified, the number of Units set forth in the Prospectus (the
"First Units") plus any additional Units which the Underwriter may become
obligated to purchase pursuant to the provisions of Section 9 hereof. The First
Units shall consist of 1,200,000 Units to be purchased from the Company.
Delivery of the First Units against payment therefor shall take place at
the offices of Underwriter, 44 Wall Street, New York, N.Y. (or at such other
place as may be designated by agreement between you and the Company) at 10:00
a.m., New York time, on , 1997, or at such later time and date as you may
designate, such time and date of payment and delivery for the First Units being
herein called the "First Closing Date."
(b) In addition, subject to the terms and conditions of this Agreement, and
upon the basis of the representations, warranties and agreements herein
contained, the Company hereby grants an option to the Underwriter to purchase
all or any part of an aggregate of an additional 180,000 Units at the same price
per Unit as the Underwriter shall pay for the First Units being sold pursuant to
the provisions of subsection (a) of this Section 2 (such additional Units being
referred to herein as the "Option Units"). This option may be exercised within
30 days after the effective date of the Registration Statement upon notice by
the Underwriter to the Company advising as to the amount of Option Units as to
which the option is being exercised, the names and denominations in which the
certificates for such Option Units are to be registered and the time and date
when such certificates are to be delivered. Such time and date shall be
determined by the Underwriter but shall not be earlier than four nor later than
ten full business days after the exercise of said option, nor in any event prior
to the First Closing Date, and such time and date is referred to herein as the
"Option Closing Date." Delivery of the Option Units against payment therefor
shall take place at the offices of Underwriter, 44 Wall Street, New York, N.Y.
The Option granted hereunder may be exercised only to cover overallotments in
the sale by the Underwriter of First Units referred to in subsection (a) above.
In the event the Company declares or pays a dividend or distribution on its
Common Stock, whether in the form of cash, shares of Common Stock or any other
consideration, prior to the
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<PAGE>
Option Closing Date, such dividend or distribution shall also be paid on the
Option Units on the Option Closing Date.
(c) The Company will make the certificates for the securities comprising
the Units to be purchased by the Underwriter hereunder available to you for
checking at least one full business day prior to the First Closing Date or the
Option Closing Date (which are collectively referred to herein as the "Closing
Dates"). The certificates shall be in such names and denominations as you may
request, at least two full business days prior to the Closing Dates. Time shall
be of the essence and delivery at the time and place specified in this Agreement
is a further condition to the obligations of the Underwriter.
Definitive certificates in negotiable form for the Units to be purchased by
the Underwriter hereunder will be delivered by the Company to you against
payment of the purchase price, by certified or bank cashier's checks in New York
Clearing House funds, payable to the order of the Company.
In addition, in the event the Underwriter exercises the option to purchase
from the Company all or any portion of the Option Units pursuant to the
provisions of subsection (b) above, payment for such Units shall be made to or
upon the order of the Company by certified or bank cashier's checks payable in
New York Clearing House funds at the offices of the Underwriter, at the time and
date of delivery of such Units as required by the provisions of subsection (b)
above, against receipt of the certificates for such Units by the Underwriter
registered in such names and in such denominations as the Underwriter may
request.
It is understood that the Underwriter proposes to offer the Units to be
purchased hereunder to the public upon the terms and conditions set forth in the
Registration Statement, after the Registration Statement becomes effective.
3. Covenants of the Company. The Company covenants and agrees with the
Underwriter that:
(a) The Company will use its best efforts to cause the Registration
Statement to become effective as promptly as possible. If required, the Company
will file the Prospectus or any Term Sheet that constitutes a part thereof and
any amendment or supplement thereto with the Commission in the manner and within
the time period required by Rules 434 and 424(b) under the Act. Upon
notification from the Commission that the Registration Statement has become
effective, the Company will so advise you and will not at any time, whether
before or after the effective date, file the Prospectus, Term Sheet or any
amendment to the Registration Statement or supplement to the Prospectus of which
you shall not previously have been advised and furnished with a copy or to which
you or your counsel shall have objected in writing or which is not in compliance
with the Act and the Rules and Regulations. At any time prior to the later of
(A) the completion by the Underwriter of the distribution of the Units
contemplated hereby (but in no event more than nine months after the date on
which the Registration Statement
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<PAGE>
shall have become or been declared effective) and (B) 25 days after the date on
which the Registration Statement shall have become or been declared effective,
the Company will prepare and file with the Commission, promptly upon your
request, any amendments or supplements to the Registration Statement or
Prospectus which, in your opinion, may be necessary or advisable in connection
with the distribution of the Units.
As soon as the Company is advised thereof, the Company will advise you, and
confirm the advice in writing, of the receipt of any comments of the Commission,
of the effectiveness of any post-effective amendment to the Registration
Statement, of the filing of any supplement to the Prospectus or any amended
Prospectus, of any request made by the Commission for amendment of the
Registration Statement or for supplementing of the Prospectus or for additional
information with respect thereto, of the issuance by the Commission or any state
or regulatory body of any stop order or other order or threat thereof suspending
the effectiveness of the Registration Statement or any order preventing or
suspending the use of any preliminary prospectus, or of the suspension of the
qualification of the Units for offering in any jurisdiction, or of the
institution of any proceedings for any of such purposes, and will use its best
efforts to prevent the issuance of any such order, and, if issued, to obtain as
soon as possible the lifting thereof.
The Company has caused to be delivered to you copies of each Preliminary
Prospectus, and the Company has consented and hereby consents to the use of such
copies for the purposes permitted by the Act. The Company authorizes the
Underwriter and dealers to use the Prospectus in connection with the sale of the
Units for such period as in the opinion of counsel to the Underwriter the use
thereof is required to comply with the applicable provisions of the Act and the
Rules and Regulations. In case of the happening, at any time within such period
as a Prospectus is required under the Act to be delivered in connection with
sales by an underwriter or dealer of any event of which the Company has
knowledge and which materially affects the Company or the securities of the
Company, or which in the opinion of counsel for the Company or counsel for the
Underwriter should be set forth in an amendment of the Registration Statement or
a supplement to the Prospectus in order to make the statements therein not then
misleading, in light of the circumstances existing at the time the Prospectus is
required to be delivered to a purchaser of the Units or in case it shall be
necessary to amend or supplement the Prospectus to comply with law or with the
Rules and Regulations, the Company will notify you promptly and forthwith
prepare and furnish to you copies of such amended Prospectus or of such
supplement to be attached to the Prospectus, in such quantities as you may
reasonably request, in order that the Prospectus, as so amended or supplemented,
will not contain any untrue statement of a material fact or omit to state any
material facts necessary in order to make the statements in the Prospectus, in
the light of the circumstances under which they are made, not misleading. The
preparation and furnishing of any such amendment or supplement to the
Registration Statement or amended Prospectus or supplement to be attached to the
Prospectus shall be without expense to the Underwriter, except that in case the
Underwriter is required, in connection with the sale of the Units to deliver a
Prospectus nine months or more after the effective date of the Registration
Statement, the Company will upon request of and at the expense of the
Underwriter, amend or
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<PAGE>
supplement the Registration Statement and Prospectus and furnish the Underwriter
with reasonable quantities of prospectuses complying with Section 10(a)(3) of
the Act.
The Company will comply with the Act, the Rules and Regulations and the
Securities Exchange Act of 1934 and the rules and regulations thereunder in
connection with the offering and issuance of the Units.
(b) The Company will use its best efforts to qualify to register the Units
for sale under the securities or "blue sky" laws of such jurisdictions as the
Underwriter may designate and will make such applications and furnish such
information as may be required for that purpose and to comply with such laws,
provided the Company shall not be required to qualify as a foreign corporation
or a dealer in securities or to execute a general consent of service of process
in any jurisdiction in any action other than one arising out of the offering or
sale of the Units. The Company will, from time to time, prepare and file such
statements and reports as are or may be required to continue such qualification
in effect for so long a period as the Underwriter may reasonably request.
(c) If the sale of the Units provided for herein is not consummated for any
reason caused by the Company, the Company shall pay all costs and expenses
incident to the performance of the Company's obligations hereunder, including
but not limited to, all of the expenses itemized in Section 8, including the
accountable out of pocket expenses of the Underwriter.
(d) The Company will use its best efforts to (i) cause a registration
statement under the Securities Exchange Act of 1934 to be declared effective
concurrently with the completion of this offering and will notify the
Underwriter in writing immediately upon the effectiveness of such registration
statement, and (ii) if requested by theUnderwriter, to obtain a listing on the
Pacific Stock Exchange and to obtain and keep current a listing in the Standard
& Poors or Moody's Industrial OTC Manual.
(e) For so long as the Company is a reporting company under either Section
12(g) or 15(d) of the Securities Exchange Act of 1934, the Company, at its
expense, will furnish to its stockholders an annual report (including financial
statements audited by independent public accountants), in reasonable detail and
at its expense, will furnish to you during the period ending five (5) years from
the date hereof, (i) as soon as practicable after the end of each fiscal year, a
balance sheet of the Company and any of its subsidiaries as at the end of such
fiscal year, together with statements of income, surplus and cash flow of the
Company and any subsidiaries for such fiscal year, all in reasonable detail and
accompanied by a copy of the certificate or report thereon of independent
accountants; (ii) as soon as practicable after the end of each of the first
three fiscal quarters of each fiscal year, consolidated summary financial
information of the Company for such quarter in reasonable detail; (iii) as soon
as they are available, a copy of all reports (financial or other) mailed to
security holders; (iv) as soon as they are available, a copy of all
non-confidential reports and financial statements furnished to or filed with the
Commission or any securities exchange or automated quotation system on which any
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<PAGE>
class of securities of the Company is listed; and (v) such other
non-confidential information as you may from time to time reasonably request.
(f) In the event the Company has an active subsidiary or subsidiaries, such
financial statements referred to in subsection (e) above will be on a
consolidated basis to the extent the accounts of the Company and its subsidiary
or subsidiaries are consolidated in reports furnished to its stockholders
generally.
(g) The Company will deliver to you at or before the First Closing Date two
signed copies of the Registration Statement including all financial statements
and exhibits filed therewith, and of all amendments thereto, and will deliver to
the Underwriter such number of conformed copies of the Registration Statement,
including such financial statements but without exhibits, and of all amendments
thereto, as the Underwriter may reasonably request. The Company will deliver to
or upon the order of the Underwriter, from time to time until the effective date
of the Registration Statement, as many copies of any Preliminary Prospectus
filed with the Commission prior to the effective date of the Registration
Statement as the Underwriter may reasonably request. The Company will deliver to
the Underwriter on the business day immediately following the effective date of
the Registration Statement and thereafter for so long as a Prospectus is
required to be delivered under the Act, from time to time, as many copies of the
Prospectus, in final form, or as thereafter amended or supplemented, as the
Underwriter may from time to time reasonably request. The Company, not later
than (i) 5:00 p.m., New York City time, on the date of determination of the
public offering price, if such determination occurred at or prior to 12:00 noon,
New York City time, on such date or (ii) 6:00 p.m., New York City time, on the
business day following the date of determination of the public offering price,
if such determination occurred after 12:00 noon, New York City time, on such
date, will deliver to the Underwriter, without charge, as many copies of the
Prospectus and any amendment or supplement thereto as the Underwriter may
reasonably request for purposes of confirming orders that are expected to settle
on the First Closing Date.
(h) The Company will make generally available to its security holders and
to the registered holders of its Warrants and deliver to you as soon as it is
practicable to do so but in no event later than 90 days after the end of twelve
months after its current fiscal quarter, an earnings statement (which need not
be audited) covering a period of at least 12 consecutive months beginning after
the effective date of the Registration Statement, which shall satisfy the
requirements of Section 11(a) of the Act.
(i) The Company will apply the net proceeds from the sale of the Units for
the purposes set forth under "Use of Proceeds and Plan of Operations" in the
Prospectus, and will file such reports with the Commission with respect to the
sale of the Units and the application of the proceeds therefrom as may be
required pursuant to Rule 463 under the Act.
(j) The Company will, promptly upon your request, prepare and file with the
Commission any amendments or supplements to the Registration Statement,
Preliminary
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<PAGE>
Prospectus or Prospectus and take any other action, which in the reasonable
opinion of Singer Zamansky LLP, counsel to the Underwriter, and Bachner, Tally,
Polevoy & Misher LLP, counsel for the Company, may be reasonably necessary or
advisable in connection with the distribution of the Units, and will use its
best efforts to cause the same to become effective as promptly as possible.
(k) The Company will reserve and keep available that maximum number of its
authorized but unissued securities which are issuable upon exercise of the Unit
Purchase Option and Finder's UPO outstanding from time to time.
(l) The Company will obtain agreements from its officers, directors and
current stockholders to the effect that for a period of 13 months from the First
Closing Date, no officer, director or current stockholder of the Company will
directly or indirectly, offer, sell (including any short sale), grant any option
for the sale of, acquire any option to dispose of, or otherwise dispose of any
shares of Common Stock without the prior written consent of the Underwriter. In
order to enforce this covenant, the Company shall impose stop-transfer
instructions with respect to the shares owned by such stockholders until the end
of such period.
(m) Prior to completion of this offering, the Company will make all filings
required, including registration under the Securities Exchange Act of 1934, to
obtain the listing of the Units, Common Stock, and Warrants on the Nasdaq
SmallCap Market (or a listing on such other market or exchange as the
Underwriter consents to), and will use its best efforts to effect and maintain
such listing for at least five years from the date of this Agreement.
(n) The Company and each of the holders of more than 5% of the stock of the
Company (the "Principal Stockholders") represents that it or he has not taken
and agree that it or he will not take, directly or indirectly, any action
designed to or which has constituted or which might reasonably be expected to
cause or result in the stabilization or manipulation of the price of the Units,
Shares or the Warrants or to facilitate the sale or resale of the Securities.
(o) On the Closing Date and simultaneously with the delivery of the Units,
the Company shall execute and deliver to you and Mr. Marc J. Gorlin,
respectively, the Unit Purchase Option and Finder's UPO. The Unit Purchase
Option and Finder's UPO will be substantially in the forms filed as Exhibits to
the Registration Statement.
(p) Without the prior written consent of the Underwriter, (i) during the 18
month period commencing on the date of this Agreement, the Company will not
grant options to purchase shares of Common Stock at an exercise price less than
the greater of (x) the initial public offering price of the Units (without
allocating any value to the Warrants) or (y) the fair market value of the Common
Stock on the date of grant; (ii) during the six month period commencing on the
date of this Agreement, grant options to any current officer of the Company;
(iii) during the three year period commencing on the date of this Agreement,
offer or sell any of its securities pursuant to Regulation S under the Act; or
(iv) grant registration rights to any person
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which are exercisable sooner than 13 months from the First Closing Date.
(q) Jonathan W. Seybold shall be the Chairman of the Board, Steven Gumins
shall be Chief Executive Officer and Deborah Griffin shall be Chief Operating
Officer of the Company on the Closing Dates. The Company has obtained key person
life insurance on the lives of Messrs. Seybold and Gumins in an amount of not
less than $2 million each and will use its best efforts to maintain such
insurance during the three year period commencing with the First Closing Date
unless his employment with the Company is earlier terminated. For a period of
thirteen months from the First Closing Date, the compensation of the executive
officers of the Company shall not be increased from the compensation levels
disclosed in the Prospectus.
(r) On the Closing Date and simultaneously with the delivery of the Units,
the Company shall execute and deliver to you an agreement with you regarding
mergers, acquisitions, joint ventures and certain other forms of transactions,
in the form previously delivered to the Company by you (the "M/A Agreement").
(s) So long as any Warrants are outstanding, the Company shall use its best
efforts to cause post-effective amendments to the Registration Statement to
become effective in compliance with the Act and without any lapse of time
between the effectiveness of any such post-effective amendments and cause a copy
of each Prospectus, as then amended, to be delivered to each holder of record of
a Warrant and to furnish to the Underwriter and dealer as many copies of each
such Prospectus as such Underwriter or dealer may reasonably request. The
Company shall not call for redemption any of the Warrants unless a registration
statement covering the securities underlying the Warrants has been declared
effective by the Commission and remains current at least until the date fixed
for redemption. In addition, for so long as any Warrant is outstanding, the
Company will promptly notify the Underwriter of any material change in the
business, financial condition or prospects of the Company.
(t) Upon the exercise of any Warrant or Warrants after _______, 1998, the
Company will pay the Underwriter, a fee of 5% of the aggregate exercise price of
the Warrants, of which a portion may be reallowed to the dealer who solicited
the exercise (which may also be the Underwriter if (i) the market price of the
Company's Common Stock is greater than the exercise price of the Warrants on the
date of exercise; (ii) the Warrantholder designates in writing that the exercise
of the Warrant was solicited by you or any other member of the National
Association of Securities Dealers, Inc., (iii) the Warrant is not held in a
discretionary account; (iv) the disclosure of compensation arrangements has been
made in documents provided to customers, both as part of the original offering
and at the time of exercise, and (v) the solicitation of the Warrant was not in
violation of Regulation M promulgated
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under the Securities Exchange Act of 1934, as amended. The Company agrees not to
solicit the exercise of any Warrants other than through the Underwriter and will
not authorize any other dealer to engage in such solicitation without the prior
written consent of the Underwriter.
(u) For a period of five (5) years from the Effective Date the Company (i)
at its expense, shall cause its regularly engaged independent certified public
accountants to review (but not audit) the Company's financial statements for
each of the first three (3) fiscal quarters prior to the announcement of
quarterly financial information, the filing of the Company's 10-Q quarterly
report and the mailing of quarterly financial information to stockholders and
(ii) shall not change its accounting firm other than to a "big six" firm without
the prior written consent of the Chairman or the President of the Underwriter.
(v) As promptly as practicable after the Closing Date, the Company will
prepare, at its own expense, hard cover "bound volumes" relating to the
offering, and will distribute at least four of such volumes to the individuals
designated by the Underwriter or counsel to the Underwriter.
(w) For a period of five years from the First Closing Date (i) the
Underwriter shall have the right, but not the obligation, to designate one
director of the Board of Directors of the Company and (ii) the Company shall
engage a public relations firm acceptable to the Underwriter.
(x) The Company shall, for a period of six years after date of this
Agreement, submit which reports to the Secretary of the Treasury and to
stockholders, as the Secretary may require, pursuant to Section 1202 of the
Internal Revenue Code, as amended, or regulations promulgated thereunder, in
order for the Company to qualify as a "small business" so that stockholders may
realize special tax treatment with respect to their investment in the Company.
(y) The Company will submit all post-effective amendments or prospectus
supplements disclosing actul price and selling terms with respect to the Selling
Securityholders to the NASD at the same time that they are filed with the
Securities & Exchange Commission.
(z) Thge Company shall deposit in escrow with American Stock Transfer &
Trust Company, the Escrow Agent, under an Escrow Agreement (the "Escrow
Agreement"), dated November ___, 1996 by and among the Company, American Stock
Transfer & Trust Company and certain shareholders and optionholders of the
Company, the number of shares of common stock and options listed on Exhibits A
and B of the Escrow Agreement.
4. Conditions of Underwriter's Obligation. The obligation of the
Underwriter to purchase and pay for the Units is subject to the accuracy (as of
the date hereof, and as of the Closing Dates) of and compliance with the
representations and warranties of the Company herein, to the performance by the
Company of its obligations hereunder, and to the following conditions:
(a) The Registration Statement shall have become effective and you
shall have received notice thereof not later than 10:00 A.M., New York
time, on the date on which the amendment to the registration statement
originally filed with respect to the Units or to the Registration
Statement, as the case may be, containing information regarding the initial
public offering price of the Units has been filed with the Commission, or
such later time and date as shall have been agreed to by the Underwriter;
if required, the Prospectus or any Term Sheet that constitutes a part
thereof and any amendment or supplement thereto shall have
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been filed with the Commission in the manner and within the time period
required by Rule 434 and 424(b) under the Act; on or prior to the Closing
Dates no stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that or a similar
purpose shall have been instituted or shall be pending or, to your
knowledge or to the knowledge of the Company, shall be contemplated by the
Commission; any request on the part of the Commission for additional
information shall have been complied with to the reasonable satisfaction of
Singer Zamansky LLP, counsel to the Underwriter;
(b) At the First Closing Date, you shall have received the opinion,
dated as of the First Closing Date, of Bachner, Tally, Polevoy & Misher
LLP, counsel for the Company, in form and substance satisfactory to counsel
for the Underwriter, to the effect that:
(i) the Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware, with full corporate power and authority to own its
properties and conduct its business as described in the Registration
Statement and Prospectus and is duly qualified or licensed to do
business as a foreign corporation and is in good standing in
California and in each other jurisdiction in which the ownership or
leasing of its properties or conduct of its business requires such
qualification, except where failure to so qualify will not materially
adversely affect the Company's business; properties, condition
(financial or otherwise) or prospects;
(ii) to the best knowledge of such counsel, (a) the Company has
obtained, or is in the process of obtaining, all licenses, permits and
other governmental authorizations necessary to the conduct of its
business as described in the Prospectus, (b) such licenses, permits
and other governmental authorizations obtained are in full force and
effect, and (c) the Company is in all material respects complying
therewith;
(iii) the authorized capitalization of the Company as of
September 30, 1996 is as set forth under "Capitalization" in the
Prospectus; all shares of the Company's outstanding stock requiring
authorization for issuance by the Company's board of directors have
been duly authorized, validly issued, are fully paid and
non-assessable and conform to the description thereof contained in the
Prospectus; the outstanding shares of Common Stock of the Company have
not been issued in violation of the preemptive rights of any
shareholder and, to the best of such counsel's knowledge, the
shareholders of the Company do not have any preemptive rights or other
rights to subscribe for or to purchase, nor are there any restrictions
upon the voting or transfer of any of the Stock; the Common Stock, the
Warrants, the Unit Purchase Option, the Finder's UPO and the Warrant
Agreement conform to the respective descriptions thereof contained in
the Prospectus; the
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Shares have been, and the shares of Common Stock to be issued upon
exercise of the Warrants, the Finder's UPO and the Unit Purchase
Option, upon issuance in accordance with the terms of such Warrants,
the Warrant Agreement, Finder's UPO and Unit Purchase Option have been
duly authorized and, when issued and delivered, will be duly and
validly issued, fully paid, non-assessable, free of preemptive rights
and no personal liability will attach to the ownership thereof; all
prior sales by the Company of the Company's securities have been made
in compliance with or under an exemption from registration under the
Act and applicable state securities laws and no shareholders of the
Company have any rescission rights with respect to Company securities;
a sufficient number of shares of Common Stock has been reserved for
issuance upon exercise of the Warrants, the Finder's UPO and Unit
Purchase Option and to the best of such counsel's knowledge, neither
the filing of the Registration Statement nor the offering or sale of
the Units as contemplated by this Agreement gives rise to any
registration rights or other rights, other than those which have been
waived or satisfied for or relating to the registration of any shares
of Common Stock;
(iv) this Agreement, the Unit Purchase Option, the Finder's UPO,
the Warrant Agreement, the M/A Agreement and the Escrow Agreement have
been duly and validly authorized, executed and delivered by the
Company and, assuming due execution by each other party hereto or
thereto, each constitutes a legal, valid and binding obligation of the
Company enforceable against the Company in accordance with its
respective terms (except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other
laws of general application relating to or affecting enforcement of
creditors' rights and the application of equitable principles in any
action, legal or equitable, and except as rights to indemnity or
contribution may be limited by applicable law);
(v) the certificates evidencing the shares of Common Stock are in
valid and proper legal form; the Warrants will be exercisable for
shares of Common Stock of the Company in accordance with the terms of
the Warrants and at the prices therein provided for; the shares of
Common Stock of the Company issuable upon exercise of the Warrants
have been duly authorized and reserved for issuance upon such exercise
and such shares, when issued upon such exercise in accordance with the
terms of the Warrants and at the price provided for, will be duly and
validly issued, fully paid and non-assessable;
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(vi) such counsel knows of no pending or threatened legal or
governmental proceedings to which the Company is a party which could
materially adversely affect the business, property, financial
condition or operations of the Company; or which question the validity
of the Securities, this Agreement, the Warrant Agreement, the Unit
Purchase Option, the Finder's UPO, the M/A Agreement or the Escrow
Agreement, or of any action taken or to be taken by the Company
pursuant to this Agreement, the Warrant Agreement, the Unit Purchase
Option, the Finder's UPO, the M/A Agreement or the Escrow Agreement;
and no such proceedings are known to such counsel to be contemplated
against the Company; there are no governmental proceedings or
regulations required to be described or referred to in the
Registration Statement which are not so described or referred to;
(vii) the Company is not in violation of or default under, nor
will the execution and delivery of this Agreement, the Unit Purchase
Option, the Finder's UPO, the Warrant Agreement, the M/A Agreement or
the Escrow Agreement, and the incurrence of the obligations herein and
therein set forth and the consummation of the transactions herein or
therein contemplated, result in a breach or violation of, or
constitute a default under the certificate or articles of
incorporation or by-laws, in the performance or observance of any
material obligations, agreement, covenant or condition contained in
any bond, debenture, note or other evidence of indebtedness or in any
contract, indenture, mortgage, loan agreement, lease, joint venture or
other agreement or instrument to which the Company is a party or by
which it or any of its properties may be bound or in violation of any
material order, rule, regulation, writ, injunction, or decree of any
government, governmental instrumentality or court, domestic or
foreign;
(viii) the Registration Statement has become effective under the
Act, and to the best of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement is in
effect, and no proceedings for that purpose have been instituted or
are pending before, or threatened by, the Commission; the Registration
Statement and the Prospectus (except for the financial statements and
other financial data contained therein, or omitted therefrom, as to
which such counsel need express no opinion) comply as to form in all
material respects with the applicable requirements of the Act and the
Rules and Regulations;
(ix) such counsel has participated in the preparation of the
Registration Statement and the Prospectus and nothing has come to the
attention of such counsel to cause such counsel to have reason to
believe that the Registration Statement or any amendment thereto at
the time it became effective or as of the Closing Dates contained any
untrue
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statement of a material fact required to be stated therein or omitted
to state any material fact required to be stated therein or necessary
to make the statements therein not misleading or that the Prospectus
or any supplement thereto contains any untrue statement of a material
fact or omits to state a material fact necessary in order to make
statements therein, in light of the circumstances under which they
were made, not misleading (except, in the case of both the
Registration Statement and any amendment thereto and the Prospectus
and any supplement thereto, for the financial statements, notes
thereto and other financial information and schedules contained
therein, as to which such counsel need express no opinion);
(x) all descriptions in the Registration Statement and the
Prospectus, and any amendment or supplement thereto, of contracts and
other documents are accurate and fairly present the information
required to be shown, and such counsel is familiar with all contracts
and other documents referred to in the Registration Statement and the
Prospectus and any such amendment or supplement or filed as exhibits
to the Registration Statement, and such counsel does not know of any
contracts or documents of a character required to be summarized or
described therein or to be filed as exhibits thereto which are not so
summarized, described or filed;
(xi) no authorization, approval, consent, or license of any
governmental or regulatory authority or agency is necessary in
connection with the authorization, issuance, transfer, sale or
delivery of the Units by the Company, in connection with the
execution, delivery and performance of this Agreement by the Company
or in connection with the taking of any action contemplated herein, or
the issuance of the Unit Purchase Option, the Finder's UPO or the
Securities underlying the Unit Purchase Option or the Finder's UPO,
other than registrations or qualifications of the Units under
applicable state or foreign securities or Blue Sky laws and
registration under the Act;
(xii) the statements in the Registration Statement under the
captions "Business", "Management", and "Description of Securities"
have been reviewed by such counsel and insofar as they refer to
descriptions of agreements, statements of law, descriptions of
statutes, licenses, rules or regulations or legal conclusions, are
correct in all material respects;
(xiii) Based upon advice from representatives of The Nasdaq Stock
Market, Inc.,the Units, the Common Stock and the Warrants have been
duly authorized for quotation on the Nasdaq Small Cap Market; and
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(xiv) to such counsel's knowledge, there are no business
relationships or related-party transactions of the nature described in
Item 404 of Regulation S-K involving the Company, any Subsidiary and
any person described in such Item that are required to be disclosed in
the Prospectus and which have not been so disclosed.
Such opinion shall also cover such matters incident to the transactions
contemplated hereby as the Underwriter or counsel for the Underwriter shall
reasonably request. In rendering such opinion, such counsel may rely upon
certificates of any officer of the Company or public officials as to matters of
fact; and may rely as to all matters of law other than the law of the United
States or of the State of Delaware upon opinion of counsel satisfactory to you,
in which case the opinion shall state that they have no reason to believe that
you and they are not entitled to so rely.
(c) All corporate proceedings and other legal matters relating to this
Agreement, the Registration Statement, the Prospectus and other related matters
shall be satisfactory to or approved by Singer Zamansky LLP, counsel to the
Underwriter, and you shall have received from such counsel a signed opinion,
dated as of the First Closing Date, with respect to the validity of the issuance
of the Units, the form of the Registration Statement and Prospectus (other than
the financial statements and other financial data contained therein), the
execution of this Agreement and other related matters as you may reasonably
require. The Company shall have furnished to counsel for the Underwriter such
documents as they may reasonably request for the purpose of enabling them to
render such opinion.
(d) You shall have received a letter prior to the effective date of the
Registration Statement and again on and as of the First Closing Date from
Richard A. Eisner & Company LLP, independent public accountants for the Company,
substantially in the form approved by you, and including estimates of the
Company's revenues and results of operations for the period ending at the end of
the month immediately preceding the effective date and results of the comparable
period during the prior fiscal year.
(e) At the Closing Dates, (i) the representations and warranties of the
Company contained in this Agreement shall be true and correct with the same
effect as if made on and as of the Closing Dates and the Company shall have
performed all of its obligations hereunder and satisfied all the conditions on
its part to be satisfied at or prior to such Closing Date; (ii) the Registration
Statement and the Prospectus and any amendments or supplements thereto shall
contain all statements which are required to be stated therein in accordance
with the Act and the Rules and Regulations, and shall in all material respects
conform to the requirements thereof, and neither the Registration Statement nor
the Prospectus nor any amendment or supplement thereto shall contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading; (iii)
there shall have been, since the respective dates as of which information is
given, no material adverse change, or any development involving a prospective
material adverse
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change, in the business, properties, condition (financial or otherwise), results
of operations, capital stock, long-term or short-term debt or general affairs of
the Company from that set forth in the Registration Statement and the
Prospectus, except changes which the Registration Statement and Prospectus
indicate might occur after the effective date of the Registration Statement, and
the Company shall not have incurred any material liabilities or entered into any
agreement not in the ordinary course of business other than as referred to in
the Registration Statement and Prospectus; and (iv) except as set forth in the
Prospectus, no action, suit or proceeding at law or in equity shall be pending
or threatened against the Company which would be required to be set forth in the
Registration Statement, and no proceedings shall be pending or threatened
against the Company before or by any commission, board or administrative agency
in the United States or elsewhere, wherein an unfavorable decision, ruling or
finding would materially and adversely affect the business, property, condition
(financial or otherwise), results of operations or general affairs of the
Company, and (v) you shall have received, at the First Closing Date, a
certificate signed by each of the Chairman of the Board or the President and the
principal financial or accounting officer of the Company, dated as of the First
Closing Date, evidencing compliance with the provisions of this subsection (e).
(f) Upon exercise of the option provided for in Section 2(b) hereof, the
obligations of the Underwriter to purchase and pay for the Option Units referred
to therein will be subject (as of the date hereof and as of the Option Closing
Date) to the following additional conditions:
(i) The Registration Statement shall remain effective at the
Option Closing Date, and no stop order suspending the effectiveness
thereof shall have been issued and no proceedings for that purpose
shall have been instituted or shall be pending, or, to your knowledge
or the knowledge of the Company, shall be contemplated by the
Commission, and any reasonable request on the part of the Commission
for additional information shall have been complied with to the
satisfaction of Singer Zamansky LLP, counsel to theUnderwriter.
(ii) At the Option Closing Date there shall have been delivered
to you the signed opinion of Bachner, Tally, Polevoy & Misher LLP,
counsel for the Company, dated as of the Option Closing Date, in form
and substance satisfactory to Singer Zamansky LLP, counsel to the
Underwriter, which opinion shall be substantially the same in scope
and substance as the opinion furnished to you at the First Closing
Date pursuant to Section 4(b) hereof, except that such opinion, where
appropriate, shall cover the Option Units.
(iii) At the Option Closing Date there shall have been delivered
to you a certificate of the Chairman of the Board or the President and
the principal financial or accounting officer of the Company, dated
the Option
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<PAGE>
Closing Date, in form and substance satisfactory to Singer Zamansky
LLP, counsel to the Underwriter, substantially the same in scope and
substance as the certificate furnished to you at the First Closing
Date pursuant to Section 4(e) hereof.
(iv) At the Option Closing Date there shall have been delivered
to you a letter in form and substance satisfactory to you from Richard
A. Eisner & Company LLP, dated the Option Closing Date and addressed
to the Underwriter confirming the information in their letter
referred to in Section 4(d) hereof and stating that nothing has come
to their attention during the period from the ending date of their
review referred to in said letter to a date not more than five
business days prior to the Option Closing Date, which would require
any change in said letter if it were required to be dated the Option
Closing Date.
(v) All proceedings taken at or prior to the Option Closing Date
in connection with the sale and issuance of the Option Units shall be
satisfactory in form and substance to you, and you and Singer Zamansky
LLP, counsel to the Underwriter, shall have been furnished with all
such documents, certificates, and opinions as you may request in
connection with this transaction in order to evidence the accuracy and
completeness of any of the representations, warranties or statements
of the Company or its compliance with any of the covenants or
conditions contained herein.
(g) No action shall have been taken by the Commission or the NASD the
effect of which would make it improper, at any time prior to the Closing Date,
for members of the NASD to execute transactions (as principal or agent) in the
Units, Common Stock or the Warrants and no proceedings for the taking of such
action shall have been instituted or shall be pending, or, to the knowledge of
the Underwriter or the Company, shall be contemplated by the Commission or the
NASD. The Company represents that at the date hereof it has no knowledge that
any such action is in fact contemplated by the Commission or the NASD. The
Company shall have advised the Underwriter of any NASD affiliation of any of its
officers, directors, stockholders or their affiliates.
(h) If any of the conditions herein provided for in this Section shall not
have been fulfilled as of the date indicated, this Agreement and all obligations
of the Underwriter under this Agreement may be cancelled at, or at any time
prior to, each Closing Date by the Underwriter. Any such cancellation shall be
without liability of the Underwriter to the Company.
5. Conditions of the Obligations of the Company. The obligation of the
Company to sell and deliver the Units is subject to the condition that at the
Closing Dates, no stop orders suspending the effectiveness of the Registration
Statement shall have been issued under the Act or any proceedings therefor
initiated or threatened by the Commission.
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If the condition to the obligations of the Company provided for in this
Section have been fulfilled on the First Closing Date but are not fulfilled
after the First Closing Date and prior to the Option Closing Date, then only the
obligation of the Company to sell and deliver the Units on exercise of the
option provided for in Section 2(b) hereof shall be affected.
6. Indemnification.
(a) The Company agrees to indemnify and hold harmless the Underwriter and
each person, if any, who controls such Underwriter within the meaning of the Act
against any losses, claims, damages or liabilities, joint or several (which
shall, for all purposes of this Agreement, include, but not be limited to, all
reasonable costs of defense and investigation and all attorneys' fees), to which
the Underwriter or such controlling person may become subject, under the Act or
otherwise, and will reimburse, as incurred, the Underwriter and such controlling
persons for any legal or other expenses reasonably incurred in connection with
investigating, defending against or appearing as a third party witness in
connection with any losses, claims, damages or liabilities, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in (A) the Registration Statement, any Preliminary
Prospectus, the Prospectus, or any amendment or supplement thereto, (B) any blue
sky application or other document executed by the Company specifically for that
purpose or based upon written information furnished by the Company filed in any
state or other jurisdiction in order to qualify any or all of the Units under
the securities laws thereof (any such application, document or information being
hereinafter called a "Blue Sky Application"), or arise out of or are based upon
the omission or alleged omission to state in the Registration Statement, any
Preliminary Prospectus, Prospectus, or any amendment or supplement thereto, or
in any Blue Sky Application, a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided, however, that
the Company will not be liable in any such case to the extent, but only to the
extent, that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in reliance upon and in conformity with written information
furnished to the Company by or on behalf of the Underwriter specifically for use
in the preparation of the Registration Statement or any such amendment or
supplement thereof or any such Blue Sky Application or any such preliminary
Prospectus or the Prospectus or any such amendment or supplement thereto. This
indemnity will be in addition to any liability which the Company may otherwise
have.
(b) The Underwriter will indemnify and hold harmless the Company, each of
its directors, each nominee (if any) for director named in the Prospectus, each
of its officers who have signed the Registration Statement, and each person, if
any, who controls the Company within the meaning of the Act, against any losses,
claims, damages or liabilities (which shall, for all purposes of this Agreement,
include, but not be limited to, all costs of defense and investigation and all
attorneys' fees) to which the Company or any such director, nominee, officer or
controlling person may become subject under the Act or otherwise, insofar as
such losses,
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claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue statement of any material
fact contained in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto, or arise out of or are based
upon the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in the Registration Statement, any Preliminary Prospectus, the Prospectus, or
any amendment or supplement thereto (i) in reliance upon and in conformity with
written information furnished to the Company by you specifically for use in the
preparation thereof and (ii) relates to the transactions effected by the
Underwriter in connection with the offer and sale of the Units contemplated
hereby. This indemnity agreement will be in addition to any liability which the
Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section, notify in writing the indemnifying party of the commencement thereof;
but the omission so to notify the indemnifying party will not relieve it from
any liability which it may have to any indemnified party otherwise than under
this Section. In case any such action is brought against any indemnified party,
and it notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate in, and, to the extent that
it may wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof, subject to the provisions herein stated, with
counsel reasonably satisfactory to such indemnified party, and after notice from
the indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation. The indemnified party
shall have the right to employ separate counsel in any such action and to
participate in the defense thereof, but the fees and expenses of such counsel
shall not be at the expense of the indemnifying party if the indemnifying party
has assumed the defense of the action with counsel reasonably satisfactory to
the indemnified party; provided that if the indemnified party is the Underwriter
or a person who controls the Underwriter within the meaning of the Act, the fees
and expenses of such counsel shall be at the expense of the indemnifying party
if (i) the employment of such counsel has been specifically authorized in
writing by the indemnifying party or (ii) the named parties to any such action
(including any impleaded parties) include both the Underwriter or such
controlling person and the indemnifying party and in the judgment of the
Underwriter, it is advisable for the Underwriter or controlling persons to be
represented by separate counsel (in which case the indemnifying party shall not
have the right to assume the defense of such action on behalf of the Underwriter
or such controlling person, it being understood, however, that the indemnifying
party shall not, in connection with any one such action or separate but
substantially similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances, be liable for the reasonable fees
and expenses of more than one separate firm of attorneys for the Underwriter and
controlling persons, which firm shall be designated in writing
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by you). No settlement of any action against an indemnified party shall be made
without the consent of the indemnifying party, which shall not be unreasonably
withheld in light of all factors of importance to such indemnifying party.
7. Contribution.
In order to provide for just and equitable contribution under the Act in
any case in which (i) the Underwriter makes claim for indemnification pursuant
to Section 6 hereof but it is judicially determined (by the entry of a final
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case, notwithstanding the fact that
the express provisions of Section 6 provide for indemnification in such case, or
(ii) contribution under the Act may be required on the part of the Underwriter,
then the Company and each person who controls the Company, in the aggregate, and
the Underwriter shall contribute to the aggregate losses, claims, damages or
liabilities to which they may be subject (which shall, for all purposes of this
Agreement, include, but not be limited to, all reasonable costs of defense and
investigation and all reasonable attorneys' fees) in either such case (after
contribution from others) in such proportions that the Underwriter is
responsible for that portion of such losses, claims, damages or liabilities
represented by the percentage that the underwriting discount per Unit appearing
on the cover page of the Prospectus bears to the public offering price appearing
thereon, and the Company shall be responsible for the remaining portion,
provided, however, that (a) if such allocation is not permitted by applicable
law then the relative fault of the Company and the Underwriter and controlling
persons, in the aggregate, in connection with the statements or omissions which
resulted in such damages and other relevant equitable considerations shall also
be considered. The relative fault shall be determined by reference to, among
other things, whether in the case of an untrue statement of a material fact or
the omission to state a material fact, such statement or omission relates to
information supplied by the Company, or the Underwriter and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such untrue statement or omission. The Company and the Underwriter agree
that it would not be just and equitable if the respective obligations of the
Company and the Underwriter to contribute pursuant to this Section 7 were to be
determined by pro rata or per capita allocation of the aggregate damages or by
any other method of allocation that does not take account of the equitable
considerations referred to in the first sentence of this Section 7 of the
portion of such losses, claims, damages or liabilities for which the Underwriter
is responsible. No person guilty of a fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who is not guilty of such fraudulent misrepresentation. As used in this
paragraph, the word "Company" includes any officer, director, or person who
controls the Company within the meaning of Section 15 of the Act. If the full
amount of the contribution specified in this paragraph is not permitted by law,
then the Underwriter and each person who controls the Underwriter shall be
entitled to contribution from the Company, its officers, directors and
controlling persons to the full extent permitted by law. The foregoing
contribution agreement shall in no way affect the contribution liabilities of
any persons having liability under Section 11 of the Act other than the Company
and
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the Underwriter. No contribution shall be requested with regard to the
settlement of any matter from any party who did not consent to the settlement;
provided, however, that such consent shall not be unreasonably withheld in light
of all factors of importance to such party.
8. Costs and Expenses.
(a) Whether or not this Agreement becomes effective or the sale of the
Units to the Underwriter is consummated, the Company will pay all costs and
expenses incident to the performance of this Agreement by the Company including,
but not limited to, the fees and expenses of counsel to the Company and of the
Company's accountants; the costs and expenses incident to the preparation,
printing, filing and distribution under the Act of the Registration Statement
(including the financial statements therein and all amendments and exhibits
thereto), Preliminary Prospectus and the Prospectus, as amended or supplemented,
or the Term Sheet, the fee of the NASD in connection with the filing required by
the NASD relating to the offering of the Units contemplated hereby; all
expenses, including reasonable fees and disbursements of counsel to the
Underwriter, in connection with the qualification of the Units under the state
securities or blue sky laws which the Underwriter shall designate; the cost of
printing and furnishing to the Underwriter copies of the Registration Statement,
each Preliminary Prospectus, the Prospectus, this Agreement, Agreement Among
Underwriter (if necessary); Selling Agreement, and the Blue Sky Memorandum, any
fees relating to the listing of the Units, Common Stock and Warrants on the
Nasdaq SmallCap Market or any other securities exchange, the cost of printing
the certificates representing the securities comprising the Units, the fees of
the transfer agent and warrant agent the cost of publication of at least two
"tombstones" of the offering (at least one of which shall be in national
business newspaper and one of which shall be in a major New York newspaper) and
the cost of preparing at least four hard cover "bound volumes" relating to the
offering, in accordance with the Underwriter's request. The Company shall pay
any and all taxes (including any transfer, franchise, capital stock or other tax
imposed by any jurisdiction) on sales to the Underwriter hereunder. The Company
will also pay all costs and expenses incident to the furnishing of any amended
Prospectus or of any supplement to be attached to the Prospectus as called for
in Section 3(a) of this Agreement except as otherwise set forth in said Section.
(b) In addition to the foregoing expenses the Company shall at the First
Closing Date pay to the Underwriter, a non-accountable expense allowance of
$180,000 of which $40,000 has been paid. In the event the overallotment option
is exercised, the Company shall pay to the Underwriter at the Option Closing
Date an additional amount equal to 3% of the gross proceeds received upon
exercise of the overallotment option. In the event the transactions contemplated
hereby are not consummated by reason of any action by the Underwriter (except if
such prevention is based upon a breach by the Company of any covenant,
representation or warranty contained herein or because any other condition to
the Underwriter's obligations hereunder required to be fulfilled by the Company
is not fulfilled) the Company shall be liable for the accountable expenses of
the Unerwriter, including legal fees up to a maximum of
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$40,000. In the event the transactions contemplated hereby are not consummated
by reason of any action of the Company or because of a breach by the Company of
any covenant, representation or warranty herein, the Company shall be liable for
the accountable out of pocket expenses of the Underwriter, including legal fees,
up to a maximum of $180,000.
(c) No person is entitled either directly or indirectly to compensation
from the Company, from the Underwriter or from any other person for services as
a finder in connection with the proposed offering, other than Mr. Marc J. Gorlin
and the Company agrees to indemnify and hold harmless the Underwriter, against
any losses, claims, damages or liabilities, (which shall, for all purposes of
this Agreement, include, but not be limited to, all costs of defense and
investigation and all attorneys' fees), to which the Underwriter may become
subject insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon the claim of any person (other
than an employee of the party claiming indemnity) or entity that he or it is
entitled to a finder's fee in connection with the proposed offering by reason of
such person's or entity's influence or prior contact with the indemnifying
party. The Underwriter agrees to pay Mr. Gorlin, as finder, $10,000 at the first
Closing and the Company shall issue Mr. Gorlin the Finder's UPO to purchase
12,000 Units.
9. Effective Date.
The Agreement shall become effective upon its execution except that you
may, at your option, delay its effectiveness until 11:00 A.M., New York time on
the first full business day following the effective date of the Registration
Statement, or at such earlier time after the effective date of the Registration
Statement as you in your discretion shall first commence the initial public
offering by the Underwriter of any of the Units. The time of the initial public
offering shall mean the time of release by you of the first newspaper
advertisement with respect to the Units, or the time when the Units are first
generally offered by you to dealers by letter or telegram, whichever shall first
occur. This Agreement may be terminated by you at any time before it becomes
effective as provided above, except that Sections 3(c), 6, 7, 8, 12, 13, 14 and
15 shall remain in effect notwithstanding such termination.
10. Termination.
(a) This Agreement, except for Sections 3(c), 6, 7, 8, 12, 13, 14 and 15
hereof, may be terminated at any time prior to the First Closing Date, and the
option referred to in Section 2(b) hereof, if exercised, may be cancelled at any
time prior to the Option Closing Date, by you if in your judgment it is
impracticable to offer for sale or to enforce contracts made by the Underwriter
for the resale of the Units agreed to be purchased hereunder by reason of (i)
the Company having sustained a material loss, whether or not insured, by reason
of fire, earthquake, flood, accident or other calamity, or from any labor
dispute or court or government action, order or decree; (ii) trading in
securities on the New York Stock Exchange, the American Stock Exchange, the
Nasdaq SmallCap Market or the Nasdaq National Market having been suspended or
limited; (iii) material governmental restrictions having been imposed on trading
in securities generally (not in force and effect on the date hereof); (iv) a
banking moratorium having
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been declared by federal or New York state authorities; (v) an outbreak in the
United States of hostilities or other national calamity or crisis or change in
economic or political conditions having occurred which has a material adverse
effect on the securities markets generally; (vi) a pending or threatened legal
or governmental proceeding or action relating generally to the Company's
business, or a notification having been received by the Company of the threat of
any such proceeding or action, which could materially adversely affect the
Company; (vii) except as contemplated by the Prospectus, the Company is merged
or consolidated into or acquired by another company or group or there exists a
binding legal commitment for the foregoing or any other material change of
ownership or control occurs; (viii) the passage by the Congress of the United
States or by any state legislative body or federal or state agency or other
authority of any act, rule or regulation, measure, or the adoption of any
orders, rules or regulations by any governmental body or any authoritative
accounting institute or board, or any governmental executive, which is
reasonably believed likely by the Underwriter to have a material impact on the
business, financial condition or financial statements of the Company or the
market for the securities offered pursuant to the Prospectus; (ix) any adverse
change in the financial or securities markets beyond normal market fluctuations
having occurred since the date of this Agreement, or (x) any material adverse
change having occurred, since the respective dates of which information is given
in the Registration Statement and Prospectus, in the earnings, business
prospects or general condition of the Company, financial or otherwise, whether
or not arising in the ordinary course of business.
(b) If you elect to prevent this Agreement from becoming effective or to
terminate this Agreement as provided in this Section 10 or in Section 9, the
Company shall be promptly notified by you, by telephone or telegram, confirmed
by letter.
11. Unit Purchase Options.
(a) At or before the First Closing Date, the Company will sell to the
Underwriter or its designees for a consideration of one mill (or such higher
price as you shall determine to be the fair market value) and upon the terms and
conditions set forth in the form of Unit Purchase Option annexed as an exhibit
to the Registration Statement, a Unit Purchase Option to purchase an aggregate
of 108,000 Units. In the event of conflict in the terms of this Agreement and
the Unit Purchase Option, the language of the Unit Purchase Option shall
control.
(b) At or before the First Closing Date, the Company will sell to Mr. Marc
Gorlin for consideration of one mill, upon the terms and conditions set forth in
the form of Finder's Unit Purchase Option ("Finder's UPO") annexed as an exhibit
to the Registration Statement, a Finder's Unit Purchase Option to purchase an
aggregate of 12,000 Units. In the event of a conflict in the terms of this
Agreement and the Finder's UPO, the language of the Finder's UPO shall control.
12. Representations, Warranties and Agreements to Survive Delivery.
The respective indemnities, agreements, representations, warranties and
other statements of the Company or its Principal Stockholders, where
appropriate, and the undertakings set forth in or made pursuant to this
Agreement will remain in full force and effect, regardless of any investigation
made by or on behalf of the Underwriter, the Company or any of its officers or
directors or any controlling person and will survive delivery of and payment of
the Units and the termination of this Agreement.
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13. Notice.
Any communications specifically required hereunder to be in writing, if
sent to the Underwriter, will be mailed, delivered and confirmed to them at D.H.
Blair Investment Banking Corp., 44 Wall Street, New York, New York 10005, with a
copy sent to Singer Zamansky LLP, 40 Exchange Place, New York, New York 10005 or
if sent to the Company, will be mailed, delivered and confirmed to it at
Heuristic Development Group, Inc., 17575 Pacific Coast Highway, Pacific
Palisades, Ca 90272 with a copy to Bachner, Tally, Polevoy & Misher LLP, 380
Madison Avenue, New York, New York 10017.
14. Parties in Interest.
The Agreement herein set forth is made solely for the benefit of the
Underwriter, the Company and, to the extent expressed, the Principal
Stockholders, any person controlling the Company or the Underwriter, and
directors of the Company, nominees for directors (if any) named in the
Prospectus, its officers who have signed the Registration Statement, and their
respective executors, administrators, successors, assigns and no other person
shall acquire or have any right under or by virtue of this Agreement. The term
"successors and assigns" shall not include any purchaser, as such purchaser,
from the Underwriter of the Units.
15. Applicable Law.
This Agreement will be governed by, and construed in accordance with, the
laws of the State of New York applicable to agreements made and to be entirely
performed within New York.
If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return this agreement, whereupon it will become a binding
agreement between the Company and the Underwriter in accordance with its terms.
Very truly yours,
HEURISTIC DEVELOPMENT GROUP, INC.
By: _______________________________
Gregory L. Zink, President
The foregoing Underwriting Agreement is hereby confirmed and accepted as of
the date first above written.
D.H. BLAIR INVESTMENT BANKING CORP.
By: _______________________________
Martin A. Bell, Vice Chairman
and General Counsel
We hereby agree to be bound by the provisions of Sections 3(l), (n), and
(p) and 12 hereof.
______________________________
______________________________
______________________________